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19 Sep 2016
Wilfred Yuen
[email protected]
(852) 2235 7131
Trading data
52-Week Range (HK$)
3 Mth Avg Daily Vol (m)
No of Shares (m)
Market Cap (HK$m)
Major Shareholders (%)
Auditors
Result Due
6.93/11.48
5.1
2,515
20,349
CITIC PE (28%)
Mr. Lou Jing (24%)
Blackrock (5%)
EY
FY16: Mar
Company description
3SBio is a leading biotechnology company in
China. The company focuses on oncology,
nephrology, and autoimmune diseases, and its
core products include TPIAO, EPIAO, and
Yisaipu. 3SBio is headquartered in Shenyang,
Liaoning Province and was listed in HKSE in
2015.
Price chart
Source: Bloomberg
0.0
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Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16
Domestic biotech leader; poised for continued growth
Rating Buy Initiation
Target Price HK$9.50
Current price
HK$8.09 Upside +17%
Emerging blockbusters in TPO, EPO, and Enbrel biosimilar 3SBio has three core products, namely TPIAO (rhTPO), EPAIO (rhEPO), and Yisaipu (“follow-on biologic” of Enbrel). TPIAO is 3SBio’s exclusive products, the only rhTPO product in PRC, where it is indicated for chemotherapy-induced thrombocytopenia (CIT) and immune thrombocytopenia (ITP). EPIAO is a market-leading anemia drug in China, where chronic kidney disease is a huge and growing problem. We see 3SBio is positioning the blood-boosting franchise for a long-term growth, given the company’s dual brand strategy (EPIAO + SEPO), complementary product offerings (IV iron sucrose and Sparin) for CKD disease management, and its pipeline’s long-acting EPO products. Yisaipu is a follow-on biosimilar drug of Pfizer’s Enbrel, a tumor necrosis factor (TNF) inhibitor indicated for rheumatoid arthritis. We model 30%, 8%, and 15% 3-year CAGR for TPIAO, EPIAO/SEPO, and Yisaipu, racking up RMB1.3bn, RMB0.9bn, and RMB1.3bn respectively in FY18E, accounting for c.80% of total sales.
Domestic biopharmaceutical leader with strong in-house sales As a domestic biotech pioneer, 3SBio is well positioned to benefit from the fast-growing biopharmaceutical industry in China, where it outpaces the growth of overall pharmaceutical industry and generates higher profit margins. Moreover, 3SBio’s sales and marketing team is sizable, supported by a team of over 1,800 sales rep and marketing staff (including a rheumatology team with over 500 personnel from Guojian), covering oncology, rheumatology, nephrology and dermatology. Sales of key products including TPIAO, EPIAO, Yisaipu rely on the company’s direct sales team.
mAb therapeutics are the next set of pipeline opportunities 3SBio is among the few Chinese drug companies with R&D capabilities in recombinant proteins and monoclonal antibody (mAb) therapeutics (a dominant class within biopharmaceuticals). The company commercialised its proprietary recombinant protein TPIAO in 2006. 3SBio has a pipeline of 38 product candidates, including 13 mAb therapeutics and two 2
nd generation EPO products. We believe
more mAb drugs to be included in the PDRLs (or the next NDRL) and lower costs driven by domestic biosimilar products will unleash the huge potential of mAb market in China.
Initiate at Buy with TP of HK$9.50 We initiate 3SBio with BUY rating and price target of HK$9.40 based on our 10-year DCF model. 3SBio is currently trading at 0.9x PEG vs. peers’ average of 1.1x. Our TP implies 1.1x PEG (or 23x FY17E P/E), in-line with peers’ average. We project 35% and 28% 3-year CAGR for revenue and net profit respectively
RMB mn FY14A FY15A FY16E FY17E FY18E
Revenue 1,131 1,673 2,821 3,581 4,136
Operating profit 343 402 842 1,076 1,259
Net profit 292 526 639 894 1,104
EPS (RMB) 0.15 0.23 0.25 0.36 0.44
P/E (x) 45.8 29.5 27.1 19.4 15.7
Sources: Company, CIRL estimates
3SBio (1530 HK)
China Puti
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Emerging blockbusters in TPO, EPO, Enbrel biosimilar
Core leading products – EPIAO, TPIAO, and Yisaipu
3SBio primarily focuses on three therapeutic areas, including nephrology, oncology,
and autoimmune diseases. The company has three core products, namely 1) TPIAO
(rhTPO), 2) EPIAO (rhEPO), and 3) Yisaipu (Enbrel biosimilar).
Exhibit 1: Key products of 3SBio: 1) TPIAO, 2) EPIAO, and 3) Yisaipu
Exhibit 1:
* Treatment for thrombocytopenia category in IMS data; ^ Acquired through the acquisition of Guojian. Its sales will be consolidated from 2016.
Source: Company, CIRL
Exhibit 2: 3SBio’s key business development milestones
Source: Company, CIRL
Product IndicationSales
(2015)
2012-15
Sales
CAGR (%)
Market
share
(2015)
no. of
competitorsHighlights
TPIAO
(特比澳)
1) Chemotherapy-induced thrombocytopenia (CIT)
2) Immune thrombocytopenia (ITP)RMB605mn 42% 41%* 0
The only approved rhTPO
product in China
EPIAO
(益比奧)
1) Anemia associated w ith chronic kidney disease (CKD)
2) Chemoptherapy-induced anemia (CIA)
3) Reduction of allogeneic blood transfusion
in surgery patients
RMB684mn 25% c.40% 10+
The only rhEPO product
approved for three
indications in China
Yisaipu^
(益賽普)
1) Rheumatoid arthritis
2) Plague psoriasis
3) Ankylosing spondylitis
RMB847mn 10% 65% 5 First-to-market drug
Year Milestone
1993 Shenyang Sunshine, the company's major operating subsidiary, w as established
1998 EPIAO w as launched
2002 EPIAO became the no.1 rhEPO product in China in terms of both sales volume and revenue
2005 TPIAO w as approved by CFDA
2006 Obtained a 5-year exclusive licnese to distribute IV Iron Sucrose
2007 Listed on NASDAQ
2010 Expansion of manufacturing capacity of EPIAO and TPIAO by 4x
2011 Upgrade of EPIAO manufacturing specif ications to fully align w ith EU standard
2013 Delisted from NASDAQ
2014 Acquired Shenzhen based biopharma Sciprogen and Italy based Sirton
2015 Acquired Zhejiang Wansheng. Listed on the HKEx.
2016 Acquired Guojian, a domestic industry leader in mAb therapeutics
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TPIAO – platelet boosting drug with strong growth potential due to exclusivity
and low penetration
3SBio’s TPIAO is the only rhTPO (recombinant human thrombopoietin) product in the
PRC market. TPO (thrombopoietin) is a human hormone largely produced by the liver
which regulates platelet production. A decrease of platelets present in the blood is a
disorder (aka thrombocytopenia) which can lead to abnormal bleeding. Therefore,
TPIAO, a genetically engineered glycosylated TPO with similar pharmacological
functions as endogenous TPO, is used to increase platelet count. TPIAO has been
approved by the CFDA for two indications: 1) chemotherapy-induced
thrombocytopenia (CIT) and 2) immune thrombocytopenia (ITP). As the only rhTPO
product in the PRC market, TPIAO does not face direct competition in China, whereas
it competes with other treatments for CIT and ITP. In the CIT market, TPIAO
competes with rhIL-11 and platelet transfusion. In the ITP market, alternative
treatment methods include corticosteroids, intravenous immunoglobulin, splenectomy
and certain chemical drugs.
Exhibit 3: Sales of TPIAO (FY09-15)
Source: Company, CIRL
TPIAO has experienced significant sales growth due to increasing patient demand
and physician acceptance, with sales increasing from RMB129mn in FY10 to
RMB605mn in FY15, representing a 5-year CAGR of 36%. We expect sales growth of
TPIAO to maintain at 25%+ in the next 3 years, due to:
1) Volume growth, low penetration, large patient population: Annual new cancer
cases increased from 3.1mn in 2010 to 3.4mn in 2014, according to China’s
National Central Cancer Registry (NCCR). The prevalence rate of CIT among
chemotherapy patient was 18% and the no. of CIT patients reached ~0.5mn in
2012. Despite growing rapidly, the penetrations of TPIAO in both the CIT and ITP
market are still low (at ~10%), according to the company. TPIAO is on the NRDL
Category B, with no. of provincial RDL increased from 4 in 2011 to 7 in 2015. We
expect more provinces to add TPIAO into the medicine catalogues in their
44%
28%
28%
49%
42%
36%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
2009 2010 2011 2012 2013 2014 2015
Sales of TPIAO (RMB mn) Growth Rate (% YoY)
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upcoming tenders. TPIAO currently cover 1,300+ hospitals (including around 800
Class III hospitals), and the majority of the sales is generated from ~10% of the
hospitals coverage. Sales of TPIAO was up by 37% YoY to RMB405mn in 1H16,
driven by ~50 hospitals where they registered 70%+ sales growth, according to
the company. The company expects to further deepen the penetration of TPIAO
and boost sales in hospitals within its existing coverage.
2) Minimal pricing pressure due to exclusivity: TPIAO faces no direct competition
in China, and we project annual price cuts of 1-2% for TPIAO.
3) Market share gain from similar drugs: TPIAO’s share by sales in the PRC CIT
drug market increased from 30.3% in 2011 to 33.8% in 2013, according to Frost
and Sullivan. We expect TPIAO will continue to gain market shares, due to
improving physicians’ awareness of the safety and efficacy of TPIAO for CIT
treatment.
4) Potential expansion of approved indications, such as leukaemia,
sepsis-induced thrombocytopenia and aplastic anemia.
Exhibit 4: TPIAO is approved for two indications: 1) CIT and 2) ITP
Source: Company, CIRL
Exhibit 5: Penetration of TPIAO on CIT in China (2013) Exhibit 6: Penetration of TPIAO on ITP in China (2013)
Exhibit 2:
Source: Company, Frost & Sullivan, CIRL Source: Company. Frost & Sullivan, CIRL
Indication of TPIAOLaunch
YearReimbursement
Chemotherapy-induced thrombocytopenia (CIT) 2006
NRDL Category B (w ork-related injuries)
7 provincial RDL (Hainan, Heilongjiang, Jilin,
Liaoning, Shaanxi, Shanghai and Tibet)
Immune thrombocytopenia (ITP) 2011 1 provincial RDL (Tibet)
490,000
220,000
22,000
0
100,000
200,000
300,000
400,000
500,000
600,000
no. of CIT patients CIT patients needed rhTPO
therapy
CIT patients received rhTPO
therapy
Penetration rate at ~10%
110,000
77,000
9,350
0
100,000
200,000
300,000
400,000
500,000
600,000
no. of ITP patients ITP patients aged over 60
ITP patients received rhTPO
therapy
Penetration rate at less than 10%
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TPIAO for the treatment of CIT:
CIT (chemotherapy-induced thrombocytopenia) is a clinical syndrome of platelet
deficiency induced by chemotherapy. Compared to rhIL-11, rhTPO has higher efficacy,
faster increases in platelet levels and fewer side effects, according to Frost and
Sullivan.
TPIAO for the treatment of ITP:
ITP (immune thrombocytopenia) is an autoimmune bleeding disease due to low
platelet count (thrombocytopenia). The cause of ITP is still unknown. According to
Frost and Sullivan, approximately 110,000 patients in China needed ITP treatment in
2013 (more than 70% were 60 years or above), whereas the penetration of rhTPO
was less than 10%. rhTPO therapy is recognised by the Chinese Experts’ Consensus
on the Chinese Experts’ Consensus on the Diagnosis and Treatment of Adult Primary
Immune Thrombocytopenia (Revised) (成人原發免疫性血小板減少症診治的中國專家
共識(修訂版)) as a treatment with low side effects, especially the elderly ITP patient
who are more sensitive to hormone therapies (a major primary treatment of ITP due to
its high efficacy and low cost).
Minimal price decline due to TPIAO’s exclusivity
Due to its exclusivity (recognised as a National Class I New Drug), the pricing
pressures of TPIAO due to provincial tenders have been minimal. According to the
company, Tianjin’s tender in 1H16 saw only 1-2% price declines.
Exhibit 7: Tender prices of TPIAO (RMB per 15,000 IU)
Source: Provincial drug tender websites, Yaozh.com, CIRL
Province 2009 2010 2011 2012 2013 2014 2015 2016Tender price
change (%)
Beijing 1,082 1,084 0%
Shanghai 1,119 NA
Guangdong 1,099 1,064 1,064 -3%
Hunan 1,140 NA
Tianjian 1,123 NA
Zhejiang 1,140 1,008 -12%
Fujian 1,008 NA
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EPIAO – market leading anemia drug in China, where chronic kidney disease is
a huge and growing problem
EPIAO is a “follow-on biologic” of Epogen, the rhEPO (recombinant human
erythropoietin) product originally developed by Amgen (AMGN US) as one of the most
successful biotech drug in history. EPO (erythropoietin) is a growth factor that
stimulates the production of red blood cells. Individuals with chronic kidney disease
(CKD) suffer from anemia (a deficiency in red blood cell count) because they do not
produce sufficient amounts of erythropoietin, which is normally produced in healthy
kidneys. Anemia can also result from chemotherapy for patients with non-myeloid
malignancies. Therefore, EPO drug is intended for anemic kidney or oncology patients,
and is considered to be an alternative to blood transfusions. Global sales of rhEPO
products reached US$8.8bn in 2013, according to IMS.
In China, 3SBio’s EPIAO is the dominant leader in the rhEPO market and is the only
rhEPO product approved by the CFDA for all three indications, including i) anaemia
associated with CKD, ii) chemotherapy-induced anaemia (CIA), and iii) the reduction
of allogeneic blood transfusion in surgery patients.
EPIAO is mainly sold to Grade III hospitals, with costs for the treatment for anaemia
associated with CKD per patient at around RMB4,000-5,000 per year. In Dec 2014,
3SBio acquired another rhEPO product, namely SEPO, through the acquisition of
Sciprogen. 3SBio will use SEPO to capture growth in the lower-tier market, where we
expect to see a larger volume growth vs. the overall rhEPO market given its lower
penetration.
Exhibit 8: EPO market in PRC Exhibit 9: Top 10 players in EPO market in PRC (2013)
Exhibit 3:
Source: Frost and Sullivan Source: Frost and Sullivan
EPIAO’s sales increased from RMB251mn in FY10 to RMB684mn in FY15,
representing a 5-year CAGR of 28%. Despite pricing pressure amid provincial tenders,
we expect volume growth for 3SBio’s EPO products to remain robust at 15%+ in the
next 3 years:
1) Large CKD patient population, significantly undertreated: The no. of patients
43.6%
14%10%
7%4% 4% 3% 3% 3% 3%
5%
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2009 2013 2018E
RMB mn
CKD associated anemia Chemotherapy-induced anemia
Allogeneic blood transfusion
614
1,264
2,955
2009-13 CAGR: 20%
2013-18E CAGR: 18%
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with CKD in China is estimated to be about 120mn in 2012, and only 18% were
treated in hospitals vs. 70% in the US. We expect no. of dialysis patients in China
to grow at 15%+ in 2016-18, which results in volume growth of rhEPO products.
2) Low penetration in oncology segment: The no. of patients suffering from CIA
was 1.6mn in China in 2013, according to Frost and Sullivan. Despite having such
an equally large patient population vs. ESRD (end-stage renal disease) patients,
the ratio between EPO used in renal dialysis and in chemotherapy is 3:1,
according to the company’s EPIAO sales breakdown. We believe the EPIAO’s
oncology sales will grow at a faster rate than that of nephrology, thanks to its low
base and an expanding insurance coverage for cancer treatments in China. We
expect more oncology drugs will be included in the next version of NRDL and
provincial critical illness insurance schemes (大病醫保), which will drive the uses
of EPO therapy for oncology patients.
3) 3SBio will maintain its dominant position in the PRC rhEPO market due to i)
EPIAO’s superior quality: according to a study sponsored by Amgen in Sep 2008,
EPIAO was one of the most similar to Epogen in terms of biochemical and
biophysical properties, ii) EPIAO’s additional indications (for oncology and surgery
patients, which representing c.30% of total revenue of EPIAO, according to the
company), iii) strong branding: 3SBio also provides complementary product
offerings, namely IV iron sucrose and Sparin for CKD disease management.
4) Dual brand strategy (EPIAO + SEPO): 3SBio will use SEPO to capture volume
growth in lower-tier market and/or provinces where tender price cuts are severe.
In 1H16, the company replaced EPIAO by SEPO in Fujian and Hubei, which
resulted in sales drop in these two provinces over this transition period. Despite
the overall EPO sales growth in 1H16 was affected (+1.1% YoY), we believe this
strategy will also help EPIAO to mitigate pricing pressure in upcoming tenders as
its sales will continue to target Class III hospitals, and expect the EPO franchise to
reinvigorate double digit growth in FY17E and FY18E.
Exhibit 10: Sales of EPIAO and SPEO (FY14-18E)
Source: Company, CIRL estimates
24.1%
22.4%
3.2%
10.0% 10.2%
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
700
800
900
1,000
2014 2015 2016E 2017E 2018E
EPIAO (RMB mn) SEPO (RMB mn) Growth Rate (% YoY)
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Exhibit 11: EPIAO was the only rhEPO product approved for all three indications in China
Source: CFDA, CIRL
Exhibit 12: Tender prices of EPIAO (RMB per 10,000 IU)
Source: Provincial drug tender websites, Yaozh.com, CIRL
Indication 1: Indication 2: Indication 3:
CKD-associated
anemia
Chemotherapy
induced
anemia
Allogeneric blood
transfer
3SBio 44%Approved
(1998)
Approved
(2001)
Approved
(2000)
Hayao Biological 14%Approved
(2005)- -
Shanghai Chemo 10%Approved
(1998)- -
Beijing Sihuan 7%Approved
(2000)- -
Huabei NCPC Genetech 4%Approved
(2000)
Approved
(2015)-
Sciprogen 3%Approved
(2001)
Approved
(2001)-
Market
Share
(2013)
Company
Province 2009 2010 2011 2012 2013 2014 2015 2016Tender price
change (%)
Beijing 114 NA
Shanghai 114 NA
Guangdong 116 98 98 -15%
Hunan 115 98 -14%
Tianjian 103 NA
Zhejiang 101 NA
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Chronic kidney disease is a huge and growing problem in China
The number of patients with chronic kidney disease in China is estimated to be about
120mn in 2012, with an overall prevalence rate of 10.8% among the adult population,
according to a state-fund study in The Lancet. The large patient population is due to
the ageing population, increasing life expectancy of CKD patients and increasing
prevalence of chronic disease such as diabetes. Another study from China Insights
Consultancy estimates that only 18% of renal disease patients in China were treated
in hospitals vs. 70% in US in 2012.
In 2012, the no. of patients of late-stage CKD (who needed dialysis treatment and
therefore rhEPO therapy) was 1.4mn, representing 1.2% of all CKD patients in China.
Despite a rapid growth in the no. of patients undergoing dialysis in China (2013:
16.4% YoY; 2014: 17.5% YoY), China’s prevalence of dialysis per million population
was only 245 in 2013, the lowest amongst the five countries with the largest dialysis
patient population. We expect dialysis patients in China will grow from 0.33mn in 2013
to 0.67mn in 2018E, representing a 5-year CAGR of 15%.
Exhibit 13: Dialysis patient growth by country 2013 vs 2012 Exhibit 14: Prevalence of dialysis (per million population) in 2013
Exhibit 4:
Source: Fresenius Medical Care, CIRL Source: Fresenius Medical Care, CIRL
1.3%
2.7%
3.2%
4.0%
4.6%
5.0%
9.3%
9.6%
11.6%
12.9%
13.1%
14.8%
14.9%
16.4%
18.7%
0% 5% 10% 15% 20%
Japan
New Zealand
Australia
Taiwan
South Korea
Hong Kong
Sinagapore
Malaysia
Philippines
Vietnam
Thailand
Indonesia
Pakistan
China
India
245
575
820
2,505
1,420
0
500
1,000
1,500
2,000
2,500
3,000
China Brazil Mexico Japan US
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Exhibit 15: Treatment rate of renal diseases to double from 18% in 2012 to 36% in 2018E
Source: China Insights Consultancy, CIRL
EPO franchise supported by complementary products for CKD disease management:
IV iron sucrose is indicated for the treatment of iron deficiency anemia and can be
prescribed in combination with EPIAO for late-stage CKD patients. Developed by
Shenyang Borui Pharmaceutical in 2005, 3SBio obtained the exclusive distribution
rights for IV iron sucrose in May 2006. The company markets and sells IV iron sucrose
to over 1,100 hospitals in China through its in-house sales team. Sales of IV iron
sucrose increased from RMB17mn in FY10 to RMB82mn in FY15, representing a
5-year CAGR of 37% (vs. EPIAO’s 22%).
Sparin, an injectable LMWH-Ca (low-molecular-weight heparin calcium) product, was
acquired from Sciprogen in Dec 2014. It is indicated for the prevention of blooding
clotting during dialysis (as well as the treatment of deep vein thrombosis). Compared
to standard heparin, LMWH-Ca has the advantages of lower side effect and more
predictable anticoagulant response. Launched in 2006, Sparin was included in the
EDL and NDRL (Category B). Sales of Sparin in FY15 was RMB49mn.
Developing long-acting rhEPO product to target pre-dialysis patients
3SBio are developing two second-generation rhEPO product candidates, namely
NuPIAO and PEG-EPO, with extended circulating half-life and increased biologic
activity as compared with first-generation rhEPO products, thereby allowing for less
frequent administrations. The company expect NuPIAO to be the first long-acting EPO
to be launched in China in 2020, which will target pre-dialysis patients. The company
expects peak sales of over RMB1bn. The global market size of long- and short-acting
EPO is approximately 1:1.5, according to IMS data.
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
20
40
60
80
100
120
140
160
180
200
2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
no. of non-treated renal disease patients in China (mn)
no. of treated renal disaese patients in China (mn)
Rate of treatment (%)
Treatment rate to double from 18% in 2012 to 36% in 2018E
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Yisaipu – the first-to-market biologic agents to treat RA in China
Yisaipu is a “follow-on biologic” of Pfizer’s Enbrel, a tumor necrosis factor (TNF)
inhibitor. 3SBio acquired Yisaipu through the acquisition of Guojian. Yisaipu is
indicated for 1) rheumatoid arthritis (RA), 2) plaque psoriasis, and 3) ankylosing
spondylitis (AS). According to IMS data, Yisaipu had a dominant market share of
64.9% in China in 2015 (2013: 61.0%).
Exhibit 16: TNF inhibitor drugs in PRC
Source: CFDA, FDA, CIRL
Yisaipu is sold at 50%+ discount compared with the originator product in China.
Treatment cost for a 3-month prescription is around RMB24k. Sales of Yisaipu in
FY15 and 1H16 were up 15.4% and 16.5% YoY to RMB847mn and RMB446mn
respectively. We model sales growth of Yisaipu to maintain at 15%+ in the next 3
years, due to:
1) Biologic therapies are fast catching up in China: Due to its better efficacy and
fewer side effects, biologics are growing fastest among all treatment options
(including NSAIDs, DMARDs, steroids, and biologics) in both the Chinese and
global market for treatment rheumatic autoimmune diseases (including RA, gout,
osteoarthritis etc.). Its market share in China was increased from 11% in 2008 to
19% in 2013, according to Guangzhou Biao Dian Medical Data. Despite growing
rapidly, its market share in rheumatoid autoimmune diseases was still significantly
lower compared to the prescription pattern in the global market where biologics
account for over 40% of market share.
2) Lower sales base and low penetration of TNF inhibitors: Rheumatoid arthritis
(RA) is a common rheumatoid autoimmune disease and is one of the largest
treatment areas by sales in the global market. Among the top five best selling
drugs in the world, three are TNF inhibitors, namely Humira, Enbrel, and
Remicade, for the treatment of RA, with their total sales of US$31bn in 2015. We
estimate that the TNF inhibitor market in China was c.RMB2bn in 2015 (vs.
US$35bn in the global market), and its penetration rate is only ~1% among the
5mn RA patients in China, due to high cost compared to non-biologic DMARDs
(e.g. monthly Rx cost of Etanercept is ~RMB8,000 vs. ~RMB400 for leflunomide).
3) Benign competitive landscape: There are only three domestic manufacturers
and three imported products in the TNF inhibitor market in China. Due to cost
advantage, domestic products occupies c.85% of the market share, and the
market share of Yisaipu was 64.9% in 2015 (2014: 61.0%) according to IMS data.
ProductChinese
nameCompany Generic name
Approval
year
by US FDA
Launch
year
in China
Yisaipu 益赛普 CP Guojian rh-TNF α receptor II - IgG Fc fusion protein NA 2005
Qiangke 强克 Celgen Biopharma rh-TNF α receptor II - IgG Fc fusion protein NA 2011
AnBaiBNuo 安佰诺 Zhejiang Hisun rh-TNF α receptor II - IgG Fc fusion protein NA 2015
Remicade 类克 JNJ/Merck Infliximab 1998 2007
Enbrel 恩利 Pfizer/Amgen Etanercept 1998 2010
Humira 修美乐 AbbVie Adalimumab 2002 2010
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Due to its favourable competitive landscape, we expect mild pricing pressure of
Yisaipu, with 2-3% annual price decline in the next 3 years.
4) More insurance coverage with more provincial RDL or the next NDRL:
Yisaipu is currently listed in provincial RDLs of seven provinces, including Hainan,
Guangdong, Shanxi, Tibet, Gansu, Hunan, and Shanghai. Given a large RA
patient population (with chronic disabling conditions), we believe more provinces
(or the next NDRL) will provide insurance coverage for Yisaipu, given 1) an
increasing physician awareness of the safety and efficacy of TNF inhibitors and 2)
its cost effectiveness vs. originator products.
Exhibit 17: The 10 best selling drugs in 2015
Source: FirstWorldPharma, PharmaCompass, CIRL
Rheumatoid Arthritis
Rheumatoid arthritis (RA) is a chronic autoimmune disease and the syndrome
includes persistent synovial inflammation and associated articular damage. The global
prevalence of RA was 0.24%, according to The Global Burden of Disease 2010 study.
In China, the prevalence rate of RA is approximately 0.32% to 0.36%, or 4.5mn to
5.0mn patients.
Biologic therapies are fast catching up in China
Similar to the US, the current therapeutic market to treat autoimmune rheumatic
diseases (including RA, gout, osteoarthritis etc.) in China includes i) anti-inflammatory
and analgesic drugs (NSAIDs), ii) hormones, iii) disease-modifying anti-rheumatic
drugs (DMARDs), iv) biological agents. Due to better efficacy and fewer side effects,
biologics are growing fastest among all treatment options and its market share in
China was increased from 11% in 2008 to 19% in 2013.
Top Brand Name CompanySales in 2015
(US$bn)Indication Remarks
1 Humira Abbvie 14.0 Autoimmune diseasesmAb
(TNF inhibitor)
2 Harvoni Gilead 13.9 Hepatitis CNS5A inhibitor
NS5B inhibitor
3 Enbrel Pfizer / Amgen 8.7 Autoimmune diseasesFusion protein
(TNF inhibtor)
4 Remicade JNJ / Merck 8.4 Autoimmune diseasesmAb
(TNF inhibitor)
5 Rituxan Roche / Biogen 7.1 Oncology mAb
6 Lantus Sanofi 7.0 Diabetes Insulin analogue
7 Avastin Roche 6.8 Oncology mAb
8 Herceptin Roche 6.6 Oncology mAb
9 Prevnar Pfizer 6.2 Streptococcus pneumoniae Vaccine
10 Revlimid Celgene 5.8 Blood related disorders Thalidomide derivative
Page 13
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Exhibit 18: Market share of rheumatic autoimmune disease drugs Exhibit 19: Scale of hospital sales in 2012 and 2013
Exhibit 5:
Source: Guangzhou Biao Dian Medical Data Source: Guangzhou Biao Dian Medical Data
Exhibit 20: Prescription pattern of rheumatic autoimmune diseases in China (2008 vs. 2013)
Source: Guangzhou Biao Dian Medical Data
517 589
366 401
302 334
244
312
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2012 2013
US$mn
Anti-inflammatory and analgesic drugsSteroidsDMARDsBiological agents
10%
11%
28%
14%
Overall growth rate: 14% YoY
Anti-inflammatory
and analgesic
drugs
36%
Steroids25%
DMARDs20%
Biological agents
19%
Prescription pattern of rheumatic autoimmune diseases in PRC (2013)
11%
19%
42%
36%
0%
10%
20%
30%
40%
50%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2008 2013
RMB mn
NSAIDs Steroids
DMARDs Biological agents
Market share of biologics (%) Market share of NSAIDs (%)
Market share of Steroids (%) Market share of DMARDs (%)
Page 14
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Domestic biopharmaceutical leader with strong in-house sales
A sizable in-house salesforce
3SBio has an in-house force of ~1,800 sales and marketing employees (including 500
from Guojian). Sales of TPIAO, EPIAO and IV Iron Sucrose rely on a dedicated team
of ~1,300 members covering 1,260 Grade III hospitals and 3,090 Grade II or lower
hospitals and medical institutions. ~500 sales and marketing employees in Guojian
are responsible for Yisaipu and Xenopax, covering 1,600 hospitals (including 1,002
Grade III hospitals). As a result, sales of key products including EPIAO, TPIAO,
Yisaipu (accounting for c.80% of total sales) rely on the company’s direct sales team.
3SBio also replies on third-party promoters to market and distribute other products,
such as SEPO, Sparin, Intefen and Inleusin.
Exhibit 21: 3SBio’s core products are sold through its in-house sales force
Source: Company, CIRL
Distribution channel Products
In-house sales and marketing TPIAO, EPIAO. IV Iron Sucrose, Yisaipu, Xenopax
Third-party promoters SEPO, Sparin, Intefen, Inleusin, Gan Xin, Si, Qu Di, Rui Si Yi, Wan Wei
724
1,800
421 462
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2014 2015
Sales and marketing team (no. of employees) no. of third-party promoters
Page 15
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Recent M&A activities
3SBio has used M&A to 1) add products which it leverages its current sales force to
sell (IV Iron Sucrose), 2) expand distribution network in fast growing lower-tier PRC
market (SEPO), 3) expand product offerings (Yisaipu) and pipeline (mAbs in Guojian
and small molecules in Wansheng), and 4) gain footing in Europe (Sirton
Pharmaceuticals SpA ).
Exhibit 22: Recent 3SBio M&A activities
Source: Company, CIRL
Exhibit 23: 3SBio’s in-licensing products
Source: Company, CIRL
Date Target Deal structure Deal Value Target Specialty
Dec 2014 Sciprogen Acquired 100% stake ~RMB560mnExpand distribution netw ork in fast-
grow ing low er-tier PRC market
Dec 2014 Sirton Acquired 100% stake ~RMB220mnContracted-based manufacturer based
in Italy, specialising in injectable products
Jul 2015 Wansheng Acquired 100% stake RMB528mn Oncology and dermatology
Mar 2016 Guojian Acquired 97.8% stake RMB6,329mn Leading mAb development in China
YearIn-licensing
productsGeneric name Indications Acquired from Sales (FY15)
2006 IV Iron Sucrose Iron Sucrose Deficiency anemia Shenyang Borui RMB81.6mn
2012 Gan Xin Metadoxine Alcoholic liver disease Shandong Qidu NA
2014Si Qu Di, Rui Si Yi,
Wan Wei
Docetaxel, anastrozole,
azasetronOncology Zheijing Wan Sheng NA
Page 16
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Biopharmaceutical industry in PRC – low penetration, higher profit margins
The biopharmaceutical industry in China is still at its nascent stage with strong growth
potential. According to IMS, the PRC biopharmaceutical market reached RMB27bn in
2013 and is expected to grow at a CAGR of 18% to reach RMB62bn in 2018. The
PRC biopharmaceutical market accounted for 5.4% of the overall PRC
pharmaceutical market in 2013 vs. 11.7% for the overall global pharmaceutical market.
Due to higher technological barriers, there are only ~130 companies in
biopharmaceutical industry vs. 4,000+ companies in chemical pharmaceutical industry
in China in 2013, according to Frost and Sullivan. Moreover, according to the data
from the SFDA South Institute, profit margins of the sub-segment biological drug
products were 2-3ppt higher than that of the overall PRC pharmaceutical market
during 2008-12.
Exhibit 24: Biopharmaceutical sales as % of overall drug market Exhibit 25: Profit margins of PRC pharma industry vs. biologics
Source: Frost and Sullivan Source: SFDA South Institution
Exhibit 26: PRC biopharmaceutical market size (2009-18)
Source: Guangzhou Biao Dian Medical Data
10.7%11.0% 11.7% 10.9%
10.2%
12.5%
13.7%14.8%
13.8%13.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2008 2009 2010 2011 2012
Profit margin of PRC pharmaceutical industry (%)
Profit margin of PRC biological drug preparation products sub-segment (%)
5.4%
11.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
PRC Global market
Biopharmaceuticals accounted for 5.4% of overall PRC drug markt vs. 11.7% in global market
44%
28%
28%
49%
42%
36%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
2009 2010 2011 2012 2013 2014 2015
Sales of TPIAO (RMB mn) Growth Rate (% YoY)
Page 17
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mAb therapeutics are the next set of pipeline opportunities
Monoclonal antibodies (mAb), the dominant class within biopharmaceuticals
Monoclonal antibodies (mAb) are monospecfiic antibody against a specific epitope on
an antigen made by identical immune cells that are all cones of a unique parent cell, in
contrast to polyclonal antibodies which are made from several different immune cells.
This class of biopharmaceutical products has experienced explosive growth since the
commercialisation of the first mAb product in 1986 and several mAbs have reached
blockbuster status. In 2015, mAbs accounted for five of the 10 top-selling drugs
(Exhibit 17) and over $75bn in annual sales worldwide, representing approximately
half of the total sales of all biopharmaceutical products. According to BCC Research,
the market for mAb products will be nearly $90bn by 2017.
In China, the market for mAb products was RMB7bn in 2015, according to Asiachem
BioPharma (亚化生物). MNCs dominate the mAb products, with over 80% market
share. We believe more mAb drugs to be included in China’s insurance
reimbursement i.e. PDRLs (or the next NDRL) and lower costs driven by domestic
biosimilar products will unleash the huge potential of mAb market in China.
3SBio is among the few Chinese drug companies with R&D capabilities in
recombinant proteins and mAb therapeutics
The company currently has a R&D team of 380 staff, focusing on the discovery and
development of biopharmaceuticals. 3SBio is among the few Chinese drug companies
with R&D capabilities in recombinant proteins and mAb therapeutics. The company
commercialised its proprietary recombinant protein TPIAO (a National Class I New
Drug) in 2006. 3SBio has a pipeline of 38 product candidates, including 13
monoclonal antibody (mAb) therapeutics and two second-generation rhEPO products.
The company has 11 antibody production lines with over 38,000 liter capacity. To
leverage on its mAb manufacturing capacity, the company plans to develop CMO
business in the coming years, as an additional business line for the company.
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Exhibit 27: 3SBio has a pipeline of 38 product candidates, focusing on nephrology, oncology and auto-immune diseases
* Ascentage's product. 3SBio has ROFR for China's market. ^ New indication for a commercialised product
Source: Company, CIRL
Key mAb product candidates:
Ipterbin (Trastuzumab)
Ipterbin is a biosimilar to Roche’s blockbuster Trastuzumab, brand name Herceptin.
Herceptin was the first mAb approved by FDA in 1998 for the treatment of Her2+
metastatic/ early stage breast cancer. Global sales of Herceptin was US$6.6bn in 2015.
In China, Herceptin was marketed in 2002. Herceptin is on six provincial RDLs,
including Guangxi, Jiangsu, Ningxia, Jiangxi, Hunan, and Zhejiang. In 2015, there were
272,000 newly detected breast cancer cases, according to the statistics from the cancer
registry compiled by NHFPC. We estimate the penetration rate and market size for
Herceptin in China was 28% and RMB2.25bn respectively in 2015, assuming 1)
average cost per patient at RMB150,000 and 2) no. of patients received Herceptin
treatment was ~15,000 vs. 54,400 patients with HER2-positive breast cancer (20% of
2015 newly detected cases). Due to high treatment cost, penetration of Herceptin in
China is still low. We expect Herceptin biosimilar manufactured by domestic
manufacturers with cost advantage and increasing insurance reimbursement coverage
will unleash the huge potential of the PRC market.
In May 2016, 3SBio voluntarily withdrew an NDA for Ipterbin, due to new CFDA policies
Therapeutic Area Product Candidate Intended IndicationDevelopment
Status
Target Launch
Year
Cinacalcet hydrochloride Hyperparathyroidism Pre-clinical 2019
Sevelamer carbonate Hyperphosphatemia Pre-clinical 2019
Colestilan Hyperphosphatemia, Hypercholersteremia IND 2018
Ferric citrate Hyperphosphatemia IND 2019
NuPIAO Anemia associated w ith CKD Phase I 2020
Voclosporin Lupus nephritis IND 2021
PEG-EPO Anemia associated w ith CKD IND 2023
HIF-PH inhibitor Anemia Pre-clinical 2024
DJ5 Autosomal dominant polycystic kidney disease Pre-clinical 2024
TAS102 Colorectal cancer IND 2019
IAP inhibitor* Solid tumors Phase I 2020
PEG-Irinotecan Solid tumors IND 2021
Bcl-2/kl inhibitor Solid tumors and luekemia Pre-clinical 2021
Leukotuximab Acute leukemia Pre-clinical 2025
Tanibirumab Cancer Pre-clinical 2027
DIG-KT Cancer Pre-clinical 2028
ALT-P7 Cancer Pre-clinical 2027-2028
Trastuzumab Metastatic breast cancer, metastatic stomach cancer NDA 2017
Rituximab non-Hodgkin lymphomas NDA 2020
Bevacizumab Non-small cell lung cancer, Age-related macular degeneration IND 2023
TDM-1 Metastatic breast cancer Pre-clinical 2024
Cetuximab Metastatic colorectal cancer CTA 2022
Nadroparin calcium Thrombosis, Blood clotting IND 2018
Eltrombopag ITP IND 2018
TPIAO^ Aplastic anemia Pre-clinical 2019
Fondaparinux sodium Prophylaxis of deep vein thrombosis Pre-clinical 2019
Trelagliptin succinate Diabetes IND 2019
Anti-TNF α mAb Rheumatoid arthritis Phase I 2022
Pegsiticase Gout IND 2023
Apremilast Psoriatic arthritis IND 2020
Abatacept Rheumatoid arthritis (RA) NDA 2020
Fluid acupunture therapy w ith Yisaipu RA, plague psoriasis and ankylosing spondylitis NDA 2019
Fluticasone Propionate Pruitus ANDA 2016
Fexofenadine Seasonal allergic rhinitis; chronic idiopathic urticaria Phase I 2017
Clindamycinphosphae Tretinoin Gel Acne vulgaris Phase III 2019
Calcipotriol Betamethasone Ointment Plaque psoriasis Pre-clinical 2019
Desonide Dermatitis Pre-clinical 2019
Inflammation Anti-il-17 antibody Inflammation Pre-clinical 2024
Nephrology
Dermatology
Auto-Immune
Diseases
and Other Areas
Oncology
Page 19
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(that require sponsors to self-inspect and validate clinical data) instituted in Jul 2015.
The company will try to re-submit the clinical trial data of Ipterbin to the CFDA by
2016-17 and expect product approval in 2017-19. There are seven other domestic
companies developing Herceptin biosimilar, which are currently in the stage of clinical
trials, including i) Genor Biopharma’s GB221 in phase II and ii) Henlius Biotech’s HLX02
in phase I.
Jiantuoxi (Rituximab)
Jiantuoxi is a biosimilar to Roche’s blockbuster Rituximab, brand name Rituxan. It is a
mAb against the protein CD20, used for the treatment of many lymphomas, leukaemia,
transplant rejection, and autoimmune diseases. Global sales of Rituximab was
US$7.1bn in 2015. In China, Rituxan was marketed in 2000. According to market
researcher Sinohealth Intelligence, its sales in China was RMB1.6bn in 2015.
Anti-EGFR mAb (Cetuximab)
This is a biosimilar to Bristol-Myers Suibb’s Cetuximab, brand name Erbitux. Erbitux is
used for the treatment of metastatic colorectal cancer (CRC), metastatic non-small cell
lung cancer and head and neck cancer (HNC). Global sales of Erbitux was US$1.4bn
in 2015, according to data from Thomson Reuters.
In China, the incidence rates for CRC and thyroid cancer (one type of HNCs) were
33.1 cases and 11.9 cases, respectively, per 100,000 persons in 2012, according to
Report of Cancer Incidence and Mortality in China, 2012 (Chen, et al. 2016). 3SBio
received approval of IND application of its anti-EGFR mAb product from the CFDA in
Aug 2016 and expects the clinical trials to start in late 2016.
Key pipeline products on nephrology:
NuPIAO and PEG-EPO are 3SBio’s two second-generation rhEPO product
candidates, with extended circulating half-life and increased biologic activity as
compared with first-generation rhEPO products, thereby allowing for less frequent
administrations. According to the company, preliminary testing of NuPIAO
demonstrated an enhanced half-life comparable to that of Amgen’s Aranesp, whereas
the pre-clinical animal model for PEG-EPO had shown that its efficacy and
pharmacokinetics are comparable to Roche’s Mircera.
Key pipeline products on autoimmune disease:
Pegsiticase is a modified pegylated recombinant uricase derived from candida utilis,
which are developing for the treatment of refractory gout and hyperuricemia. The
product candidate was acquired from EnzymeRx LLC for a consideration of
US$6.25mn in Nov 2010. In May 2014, the company granted an exclusive license to
Selecta Biosciences to develop, commercialise and sell pegsiticase worldwide,
excluding China, Hong Kong, Macau, Taiwan, and Japan. According to IMS, the PRC
uricase drug market reached over RMB144mn in 2013.
Page 20
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Valuation
Initiate at Buy with Target Price of HK$9.50
We derive the Target Price of HK$9.50, based on a 10-year discounted cash flow (DCF)
analysis. We assume a WACC of 9.5% and a terminal growth rate of 4%, given the
growth potential of biopharmaceuticals in China. Our target price implies 1.1x PEG
(using 2-year forward EPS CAGR), in-line with peers’ average. Given the company’s
leadership position in PRC biopharmaceutical industry and its attractive proprietary
pipeline, we believe the stock is attractive.
Exhibit 28: DCF analysis of 3SBio
Source: Company, CIRL estimates
RMB mn 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
EBIT 402 842 1,076 1,259 1,427 1,613 1,806 2,005 2,205 2,404 2,596
NOPAT 360 716 915 1,070 1,213 1,371 1,535 1,704 1,874 2,043 2,207
Capex (44) (250) (270) (290) (309) (349) (391) (434) (478) (521) (562)
Working Capital (59) (260) (53) (223) (238) (269) (301) (334) (368) (401) (433)
D&A 77 211 217 225 314 355 397 441 485 529 571
Free Cash Flow 334 417 808 782 980 1,107 1,240 1,377 1,514 1,651 1,783
WACC 9.5%
Terminal grow th 4.0%
PV (CF over next 10 years) 7,299
PV(Terminal value) 14,894
Enterprise Value 22,192
+ Net Cash (debt) (1,628)
- Minority interests 250
+ Others 0
Equity Value (RMB mn) 20,315
Total share outstandings 2,515
Equity value per share (HK$) 9.50
Sensitivity analysis:
9.5 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
8.0% 10.5 11.4 12.4 13.6 15.2 17.4 20.4
8.5% 9.5 10.2 11.0 11.9 13.1 14.7 16.8
9.0% 8.7 9.2 9.8 10.6 11.5 12.7 14.2
9.5% 7.9 8.4 8.9 9.5 10.2 11.1 12.3
10.0% 7.3 7.7 8.1 8.6 9.2 9.9 10.8
10.5% 6.7 7.1 7.4 7.8 8.3 8.9 9.6
11.0% 6.3 6.5 6.8 7.2 7.6 8.0 8.6
Terminal growth
WA
CC
Page 21
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Exhibit 29: Peer comparison
Exhibit 6:
Source: Bloomberg, CIRL
Financials
Revenue
We forecast 3SBio’s revenue will up 69% YoY to RMB2,821mn in FY16E, driven by 1)
strong growth of TPIAO, 2) sales of Yisaipu, which was consolidated since 2Q16, 3)
full-year sales contribution from Zhejiang Wansheng. We estimate revenue growth in
FY17/18E at 27%/15%, driven by TPIAO, EPIAO/SEPO and Yisaipu.
Exhibit 30: Revenue model of 3SBio (FY14-18E)
* Sales of Yisaipu was consolidated into the company since Apr 2016
^ Sales of Zhejiang Wansheng was consolidated into the company since Aug 2015
Source: Company, CIRL estimates
Company Ticker Price Mkt Cap FY15-17E PEG
HK$ HK$mn 2015 2016E 2017E 2015 2016E 2017E CAGR 2015 2016E 2017E
3SBio 1302 HK 8.09 20,349 29.5 27.1 19.4 80% 21% 40% 30% 0.9 16% 11% 13%
Lee's Pharm 950 HK 7.29 4,300 24.4 18.4 17.0 19% 1% 12% 6% 2.9 19% 15% 15%
FDJZ 1349 HK 7.55 6,969 50.4 39.2 28.8 8% 23% 46% 34% 1.2 18% 20% 24%
Luye 2186 HK 4.95 16,439 29.8 16.1 14.2 25% 16% 14% 15% 1.1 14% 14% 14%
Livzon 1513 HK 44.10 21,239 35.5 20.4 17.1 21% 20% 23% 21% 1.0 15% 15% 15%
CMS 867 HK 13.48 33,528 23.7 21.8 18.0 -5% 32% 22% 27% 0.8 21% 22% 23%
Sino Biopharm 1177 HK 4.97 36,839 20.8 18.2 15.9 18% 19% 11% 15% 1.2 25% 24% 22%
CSPC 1093 HK 7.45 45,086 28.1 21.5 17.6 31% 24% 22% 23% 0.9 20% 22% 23%
Fosun Pharma 2196 HK 23.30 60,523 22.0 17.1 14.8 16% 12% 12% 12% 1.4 14% 14% 14%
Average 29.3 21.6 17.9 17% 18% 20% 19% 1.3 18% 18% 19%
Average ex Lee's Pharm 30.0 22.0 18.1 16% 21% 21% 21% 1.1 18% 19% 19%
P/E (x) Earnings growth ROE (%)
RMB mn 2014 2015 2016E 2017E 2018E
TPIAO 445 605 817 1,067 1,337
Yisaipu* - - 740 1,140 1,311
EPIAO + SEPO 594 727 750 825 909
IV Iron Sucrose 65 82 90 99 109
Zhejiang Wansheng^ NA 103 250 263 276
Others 27 156 174 188 195
Revenue (RMB mn) 1,131 1,673 2,821 3,581 4,136
% YoY
TPIAO - 36% 35% 31% 25%
Yisaipu - - - 54% 15%
EPIAO + SEPO - 22% 3% 10% 10%
IV Iron Sucrose - 26% 10% 10% 10%
Zhejiang Wansheng - - 142% 5% 5%
Others - 469% 11% 8% 4%
Revenue Growth Rate (% YoY) - 48% 69% 27% 16%
%
TPIAO 39% 36% 29% 30% 32%
Yisaipu - - 26% 32% 32%
EPIAO + SEPO 53% 43% 27% 23% 22%
IV Iron Sucrose 6% 5% 3% 3% 3%
Zhejiang Wansheng - 6% 9% 7% 7%
Others 2% 9% 6% 5% 5%
Revenue mix (%) 100% 100% 100% 100% 100%
Page 22
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Margin analysis, SG&A ratio, R&D ratio
3SBio’s gross profit margin was decreased from 92.3% in FY14 to 85.5% in FY15, due
to the lower margin from Sirton, Sciprogen, and Zhejiang Wansheng. Excluding the
effect of consolidation of subsidiaries, gross profit margin was stable at 92.0% in FY15.
Guojian’s gross profit margin was 93.0%/93.6% in FY14/15. We model FY16/17/18E
GPM at 85.3%/86.3%/86.6%, based on change in product mix.
Selling expense ratio was decreased from 38.2% in FY14 to 35.0% in FY15, due to
improved sales productivity and the consolidation of Sciprogen and Sirton (both of
which had a lower distribution ratio). Administrative expense ratio increased from
15.1% in FY14 to 18.0% in FY15, due to listing expenses, advisory fees and warrant
expenses to Guojian’s management. Excluding the impact of listing expense, advisory
fees and warrant expenses, administrative expense ratio was 6.5% and 7.5% in FY14
and FY15 respectively. We model a stable SG&A ratio of 46%-47% over FY16-18E,
mainly reflecting lower administrative costs in the coming years.
R&D expense ratio was down 1.9ppt YoY to 6.7% in FY15. According to Guojian, its
R&D ratio was up 4.3ppt YoY to 20.3% in FY15. We model R&D ratio at
8.8%/9.3%/9.3% in FY16/17/18E.
Exhibit 31: Margin analysis (FY14-18E) Exhibit 32: SG&A ratio and R&D ratio (FY14-18E)
Exhibit 7:
Source: Company, CIRL estimates Source: Company, CIRL estimates
Capex
Capex will be used for maintenance of existing facilities and expansion of its
production capabilities. We model capex of RMB250mn/270mn/RMB290mn (vs.
guidance of RMB200-250mn) in FY16/17/18E, representing capex to sales ratio of
8.9%/7.5%/7.0%.
38.2%35.0%
36.1% 36.3% 36.3%
15.1%18.0%
10.5% 10.6% 10.6%
8.5% 6.7%8.8% 9.3% 9.3%
0%
10%
20%
30%
40%
50%
2014 2015 2016E 2017E 2018E
Selling and distribution expenses
Administrative expenses
R&D ratio
92.3%85.5% 85.3% 86.3% 86.6%
30.3%
24.0%
29.9% 30.1% 30.4%
25.8%
31.5%
22.7%24.6% 26.1%
0%
20%
40%
60%
80%
100%
2014 2015 2016E 2017E 2018E
Gross profit margin Operating profit margin
Net margin
Page 23
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Bank Borrowings
The company had an aggregate interest-bearing bank borrowings of RMB3,545mn as
of Jun 2016 vs. RMB405mn as of Dec 2015. The increase in bank borrowings was
due to additional bank loans of RMB3,998mn taken in 2016 for the acquisition of
Guojian. According to the company, it expects to repay RMB1bn annually. As a result,
we model a decreasing trend for financing costs at RMB160mn/RMB110mn/
RMB60mn in FY16/17/18E.
Net profit
Net profit was up 80% YoY to RMB526mn in FY15. Excluding i) share-based
expenses, ii) warrant expenses to Guojian’s management, iii) listing expenses, iv)
expenses for acquisition of Guojian, v) fair value gain in Guojian, normalised net profit
was up 46% YoY to RMB411mn.
We forecast net profit to grow from RMB526mn in FY15 to RMB1,079mn in FY18E,
representing a CAGR of 27%.
Exhibit 33: Net profit growth, 2014-18E
Source: Company, CIRL estimates
80%
21%
38%
22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
200
400
600
800
1,000
1,200
2014 2015 2016E 2017E 2018E
Net profit (RMB mn) % YoY
Page 24
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Company Background
Exhibit 34: Product portfolio of 3SBio
Source: Company, CIRL
Exhibit 35: Management Profile
Source: Company
Product Generic Name Indication Insurance Coverage Highlights
TPIAORecombinant human
thrombopoietin (rhTPO)
• CIT
• ITP
• NRDL Cat. B (w ork-
related injuries), 7 PRDLs
• 1 PRDL
The only approved rhTPO product in China
EPIAO
Injectable recombinant
human erythropoietin
(rhEPO)
• CKD-associated anemia
• Chemo-induced anemia
• Reduction of allogeneic blood
• NRDL Cat. B
• 3 PRDLs
• 8 PRDLs
The only rhEPO product approved for three
indications in China
YisaipurhTNF-α-receptor II - IgG
Fc fusion protein
• Rheumatoid arthritis
• Plague psoriasis
• Ankylosing spondylitis
7 PRDLs First-to-market drug
IV Iron
SucroseIron Sucrose Iron deficiency anemia NRDL Cat. B Complementary to EPIAO
SEPO
Injectable recombinant
human erythropoietin
(rhEPO)
• CKD-associated anemia
• Chemo-induced anemia
• NRDL Cat. B
• 8 PRDL
Complementary to EPIAO in dosage form,
coverage area, distribution channel
Sparin
Injectable low -molecular
w eight Heparin Calcium
(LMWH-Ca)
• Prevention of clotting during
dialysis
• Deep vein thrombosis
NRDL Cat. B and
National EDLComplementary to EPIAO and SEPO
IntefenRecombinant human
interferon alpha-2a
• Malignancies of lymphatic system,
viral infectious diseases, chronic
Hep. C, genital w arts
NRDL Cat. BOne of the f irst interferon alpha-2a products
marketed in China
Inlesin
Recombinant human
interleukin 2
(IL-2)
• Renal cell carcinoma, melanoma,
thoracic f luid bluid up caused by
cancer and TB
NRDL Cat. BOne of the f irst interleukin products introduced
in China
Name Position Experience and Responsibility
Mr. Lou Jing
Chairman,
CEO,
Executive
Director
• Mr. Lou w as the leading scientist in the development of EPIAO and TPIAO.
• Mr. Lou w as selected as a member of the national program “the Recruitment Program of Global Experts”,
aka “Thousand Talents Program”, in 2013.
• Mr. Lou obtained a Medical Doctor degree in clinical medicine from Shanghai Second Military Medical
University in 1985. He conducted post-doctoral research at National Institutes of Health of the U.S. after
obtaining a Ph.D. degree in molecular and cell biology from Fordham University in the U.S. in 1994. He also
obtained an Executive MBA from China Europe International Business School in 2008.
Mr. Tan Bo
CFO,
Executive
Director
• Mr. Tan joined Shenyang Sunshine as the CFO and vice president in 2009.
• He served as a vice president in the equity research division of Lehman Brothers Asia Limited from March
2006 to March 2007. He w orked as a senior analyst at Macquarie Securities Asia in Hong Kong from
October 2004 to February 2006.
• Mr. Tan obtained a Bachelor’s degree in Economics from Renmin University of China (中國人民大學) in
July 1994, a Master’s degree in Economics from the University of Connecticut in December 1996 and a
Master of International Management from Thunderbird School of Global Management in August 1998.
Ms. Su Dongmei
Senior VP,
Executive
Director
• Ms. Su is responsible for strategic direction and leadership of R&D of the Group.
• Ms. Su joined Shenyang Sunshine as a scientist of the R&D department in January 1993, and served as a
director of the R&D department from 1997 to 2006.
• Ms. Su obtained a Bachelor’s degree in Biochemistry from Jilin University (吉林大學) in July 1992 and a
Master’s and a Doctorate degree in Microbiology and Pharmacology from Shenyang Pharmaceutical
University (瀋陽藥科大學) in June 2001 and July 2010, respectively. She has published in a number of
academic journals on microbiology and medicinal biotechnology.
Mr. Huang Bin
VP,
Executive
Director
• Mr. Huang is in charge of the administrative management of the Group and the operations management of
the Group’s subsidiaries and joint ventures.
• Mr. Huang joined Shenyang Sunshine in 1993 as a manager of the human resources department.
• Mr. Huang received a diploma in Engineering from Northeast University (東北大學) in July 1987. He
attended a one-year training program in business management in Tsinghua University (清華大學) from April
2000 to April 2001.
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Risk Factors
Pricing risks
In China, pharmaceutical products are required to participate in a
government-sponsored competitive bidding process every year or every few years.
Recently, some new methods are used in the provincial tendering process, which
created downward pressures on the prices of pharmaceutical products. For example,
in 1H16, the company’s EPIAO faced pressure in certain provincial tendering process
and registered a drop in sales by 5.6% YoY.
Integration risks
There are integration risks that the company may not be able to integrate acquired
subsidiaries (such as Sciprogen and Sirton in Dec 2014 and Guojian in Mar 2016) to
achieve expect synergies and to fulfil the purposes of the acquisitions.
Competition risks
The company competes with other local and overseas pharmaceutical companies.
Their products can be used as substitute for the company’s products if they provide
similar indications.
Pipeline risks
The long-term competitiveness hinges on a company’s pipeline and its ability to
develop and commercialise new biotechnology and other pharmaceutical products.
There are risks of failure to meet safety, efficacy or other standards during the R&D
process, or the failure to obtain necessary regulatory approvals. Competition risks and
rapidly changing market demand would make commercialisation efforts more complex
and less certain.
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Exhibit 36: Financial Summary
Source: Company, CIRL estimates
Income statement Cash flow
Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E
Revenue 1,131 1,673 2,821 3,581 4,136 PBT 360 588 752 1,051 1,299
COGS (87) (242) (416) (491) (553) Taxes (133) (66) (113) (158) (195)
Gross profit 1,043 1,431 2,405 3,090 3,584 D&A 33 77 211 217 225
SG&A (602) (887) (1,314) (1,681) (1,941) CFO before WC change 494 580 1,099 1,353 1,559
R&D (96) (111) (248) (333) (383) Change in w orking capital 26 (59) (260) (53) (223)
Operating Profit 343 402 842 1,076 1,259 Cashflow from operation 387 455 726 1,142 1,141
Net f inance cost (5) 7 (135) (85) (35) CAPEX (20) (61) (250) (270) (290)
PBT 360 588 752 1,051 1,299 Free cash flow 367 394 476 872 851
Tax (68) (62) (113) (158) (195) Dividends (659) 0 0 0 0
Minority Interests 0 (0) 0 0 0 Balance Sheet adj. 652 (2,826) (3,548) (85) (35)
Net profit 292 526 639 894 1,104 Shares issued 0 4,133 0 0 0
Dividend (659) 0 0 0 0 Net cash flow 360 1,701 (3,073) 787 816
Net cash (debt) start (615) (255) 1,445 (1,628) (840)
Net cash (debt) at year-end (255) 1,445 (1,628) (840) (25)
Balance Sheet Ratios
Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E Year to Dec FY14A FY15A FY16E FY17E FY18E
Cash & cash equivalents 362 1,850 1,572 1,360 1,175 Growth rate (%)
Inventories 100 134 230 281 309 Revenue 29.2% 48.0% 68.6% 27.0% 15.5%
Trade receivables 348 550 996 1,064 1,315 Gross profit 31.7% 37.2% 68.0% 28.5% 16.0%
Other receivables 76 147 100 100 100 Operating profit 81.4% 17.2% 109.5% 27.8% 17.0%
Other current assets 56 82 150 150 150 Net profit 204.2% 80.4% 21.5% 39.8% 23.6%
PPE 374 450 1,790 1,932 2,086 Margins (%)
Other intangible assets 636 1,059 5,813 5,723 5,633 Gross profit margin 92.3% 85.5% 85.3% 86.3% 86.6%
Other non-current assets 354 2,359 336 336 336 Operating profit margin 30.3% 24.0% 29.9% 30.1% 30.4%
Total assets 2,306 6,630 10,988 10,946 11,106 Net profit margin 25.8% 31.5% 22.7% 25.0% 26.7%
Other ratios
Trade payables 26 34 79 95 101 ROE (%) 29.1% 16.1% 10.7% 13.2% 14.2%
Other payables 603 310 500 550 600 ROA (%) 16.3% 11.8% 7.3% 8.1% 10.0%
ST borrow ings 617 405 500 250 0 Net gearing (%) 27.1% -25.6% 24.8% 11.3% 0.3%
Other current liabilities 5 23 20 20 20 Interest coverage (x) 12 15 5 10 21
LT borrow ings 0 0 2,700 1,950 1,200 Receivables days 93 98 100 105 105
Other non-current liabilities 111 222 620 620 620 Payables days 68 45 50 65 65
Total Liabilities 1,363 995 4,419 3,485 2,541 Inventory days 315 177 160 190 195
Effective tax rate (%) 19.0% 10.5% 15.0% 15.0% 15.0%
Share capital 0 0 0 0 0
Reserves 932 5,624 6,318 7,211 8,314
Shareholders' equity 932 5,624 6,318 7,211 8,314
Minorities 11 11 250 250 250
Total equity 944 5,635 6,568 7,461 8,564
Net cash (debt) (255) 1,445 (1,628) (840) (25)
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Rating Policy
Rating Definition
Stock Rating Buy Outperform HSI by 15%
Neutral Between -15% ~ 15% of the HSI
Sell Underperform HSI by -15%
Sector Rating Accumulate Outperform HSI by 10%
Neutral Between -10% ~ 10% of the HSI
Reduce Underperform HSI by -10%
Analysts List
Hayman Chiu Research Director (852) 2235 7677 [email protected]
Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]
Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]
Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]
Chloe Chan Research Analyst (852) 2235 7170 [email protected]
Johnny Yum Research Assistant (852) 2235 7617 [email protected]
Analyst Certification
I, Wilfred Yuen hereby certify that all of the views expressed in this report accurately reflect my personal views about
the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,
is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.
Disclaimer
This report has been prepared by the Cinda International Research Limited. Although the information and opinions
contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International
cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not
be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and
comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers
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