Page 1 of 21 11 Oct 2017 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 4.21/5.59 0.5 794 3,553 Mr. Li Kei Ling (43%) Mr. Leung Hong Man (6%) Mr. Li Tung Ming (5%) E&Y FY17: Mar Company description Founded Suzhou, China, in 1995, Dawnrays Pharmaceutical is engaged in the development, manufacturing, and sales of intermediates and bulk medicines, cephalosporin antibiotics and drugs for cardiovascular and liver diseases. Price chart Source: Bloomberg 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Thrive on China’ s generic drug reform Rating Buy Initiation Target Price HK$5.50 Current price HK$4.48 Upside +23% Thrive on bioequivalence for Amlodipine and Entecavir We are initiating coverage on Dawnrays with Buy rating and target price of HK$5.50. We believe Dawnrays represents one of the best pharmaceutical companies in the smaller cap space that are poised to benefit from China’s generic drug reform, which is calling for an industry-wide bioequivalence (BE) for generics with new guidelines and imminent deadlines. We see upcoming progress on BE testing on Amlodipine and Entecavir in the next 12-18 months to be the major re-rating catalyst for Dawnrays. The competitive landscape after the completion of BE testing will favour faster adoption of generics against originator drugs, which allows us to model an accelerating sales growth for the company. We highlight that the company’s Anneizhen was a first-to-market generic Amlodipine Besylate in China and its generic Entecavir (Leiyide) is a domestic premium brand, securing better pricing in government-led tendering vs. other domestic generic entecavir. We estimate EPS to grow 11%/14%/19% in FY17/18/19E, after a 12% drop in FY16. Sales recovery for generic Entecavir after sales restructuring In Jul 2016, the company terminated the agency contract with its master agency for the sales of Leiyide in China, as the agency was acquired by an SOE and did not purchase the products in 2Q16. The company had completed sales restructuring for Leiyide by 2Q17 and the product saw a growth recovery in 1H17, with sales amounting to RMB100mn in 1H17 vs. RMB40mn/RMB67mn in 1H16/2H16. We model 134%/15%/20% sales growth for Leiyide in FY17/18/19E. Solid hypertension franchise We project an accelerating growth for “An” series for the next 3 years, with 12%/15%/20% growth in FY17/18/19E (vs. FY14-16 CAGR of 19%), due to: i) accelerated sales growth of Anneizhen (Amlodipine Besylate tablet) after BE test, ii) volume-led growth of Anneixi (Losartan Potassium and Hydrochlorothiazide) due to inclusion of the new NRDL (National Reimbursement Drug List) in 2017, and iii) a well-established brand equity of “An” series. Valuation and Risks Dawnrays is trading at 9.1x forward FY18E P/E. Our target price of HK$5.50 is based on a target PEG multiple of 0.85x, which is at a 15% discount to peers’ average of 1.0x. We project 18% and 14% 3-year CAGR for revenue and net profit respectively. We expect a re-rating of the company, owing to i) FY17 results on strong growth recovery of entecavir generic, ii) progress on quality consistency evaluation/ bioequivalence tests, and iii) new drug launches (Esomeprazole in 2Q/3Q18). Risks include i) slower than expected progress on BE tests, ii) delayed approvals for new products (Esomeprazole). RMB mn FY15A FY16A FY17E FY18E FY19E Revenue 985 824 1,025 1,155 1,341 Net profit 302 266 292 331 392 EPS (RMB) 0.38 0.33 0.37 0.42 0.49 P/E (x) 10.1 11.5 10.4 9.1 7.7 Sources: Company, CIRL estimates Dawnrays Pharmaceutical (2348 HK) China Puti
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Dawnrays Pharmaceutical (2348 HK) China Putiimg3.gelonghui.com/pdf201710/pdf20171016112948336.pdf · selling at a discount of 50%+. We have not seen a real “patent cliff” on Baraclude
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manufacturing, and sales of intermediates and bulk
medicines, cephalosporin antibiotics and drugs for
cardiovascular and liver diseases.
Price chart
Source: Bloomberg
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Thrive on China’s generic drug reform
Rating Buy Initiation
Target Price HK$5.50
Current price
HK$4.48 Upside +23%
Thrive on bioequivalence for Amlodipine and Entecavir We are initiating coverage on Dawnrays with Buy rating and target price of HK$5.50. We believe Dawnrays represents one of the best pharmaceutical companies in the smaller cap space that are poised to benefit from China’s generic drug reform, which is calling for an industry-wide bioequivalence (BE) for generics with new guidelines and imminent deadlines. We see upcoming progress on BE testing on Amlodipine and Entecavir in the next 12-18 months to be the major re-rating catalyst for Dawnrays. The competitive landscape after the completion of BE testing will favour faster adoption of generics against originator drugs, which allows us to model an accelerating sales growth for the company. We highlight that the company’s Anneizhen was a first-to-market generic Amlodipine Besylate in China and its generic Entecavir (Leiyide) is a domestic premium brand, securing better pricing in government-led tendering vs. other domestic generic entecavir. We estimate EPS to grow 11%/14%/19% in FY17/18/19E, after a 12% drop in FY16.
Sales recovery for generic Entecavir after sales restructuring In Jul 2016, the company terminated the agency contract with its master agency for the sales of Leiyide in China, as the agency was acquired by an SOE and did not purchase the products in 2Q16. The company had completed sales restructuring for Leiyide by 2Q17 and the product saw a growth recovery in 1H17, with sales amounting to RMB100mn in 1H17 vs. RMB40mn/RMB67mn in 1H16/2H16. We model 134%/15%/20% sales growth for Leiyide in FY17/18/19E.
Solid hypertension franchise We project an accelerating growth for “An” series for the next 3 years, with 12%/15%/20% growth in FY17/18/19E (vs. FY14-16 CAGR of 19%), due to: i) accelerated sales growth of Anneizhen (Amlodipine Besylate tablet) after BE test, ii) volume-led growth of Anneixi (Losartan Potassium and Hydrochlorothiazide) due to inclusion of the new NRDL (National Reimbursement Drug List) in 2017, and iii) a well-established brand equity of “An” series.
Valuation and Risks Dawnrays is trading at 9.1x forward FY18E P/E. Our target price of HK$5.50 is based on a target PEG multiple of 0.85x, which is at a 15% discount to peers’ average of 1.0x. We project 18% and 14% 3-year CAGR for revenue and net profit respectively. We expect a re-rating of the company, owing to i) FY17 results on strong growth recovery of entecavir generic, ii) progress on quality consistency evaluation/ bioequivalence tests, and iii) new drug launches (Esomeprazole in 2Q/3Q18). Risks include i) slower than expected progress on BE tests, ii) delayed approvals for new products (Esomeprazole).
RMB mn FY15A FY16A FY17E FY18E FY19E
Revenue 985 824 1,025 1,155 1,341
Net profit 302 266 292 331 392
EPS (RMB) 0.38 0.33 0.37 0.42 0.49
P/E (x) 10.1 11.5 10.4 9.1 7.7
Sources: Company, CIRL estimates
Dawnrays Pharmaceutical (2348 HK)
China Puti
Page 2 of 21
Generic entecavir, boosted by BE test and sales restructuring
Leiyide (entecavir) to accelerate growth after quality consistency evaluation
Dawnrays launched its entecavir generic, with a brand name of Leiyide (雷易得), in
2011. Bristol-Myers Squibb first launched its originator drug, namely Baraclude, in Apr
2005 in US and Feb 2006 in China. In China, originator Baraclude is selling at a
premium price (c.RMB25 per tablet), with a market-leading share of 40% in the
entecavir market, despite a dozen of domestic generics (most launched in 2010-13)
selling at a discount of 50%+. We have not seen a real “patent cliff” on Baraclude and
the branded drugs have been given “improved quality score” in provincial tenders,
thereby protecting it from direct generic competition in the hospital market. We expect
to see such a preferential treatment to eliminate after domestic generic manufacturers
complete the quality consistency evaluation (一致性評價)/ bioequivalence (BE) test,
thereby driving a faster adoption of generics and favouring leading domestic
drugmakers.
Dawnrays submitted CFDA filing for quality consistency evaluation for Entecavir
generic in Aug 2016 and its bioequivalence (BE) test was initiated in Aug 2017.
Dawnrays expects Leiyide to accelerate growth after quality consistency evaluation is
completed and will continue to position Leiyide as a domestic premium brand to rival
with originator drug, citing:
1) Dawnrays is the only domestic entecavir manufacturer that maintained the
tender pricing “perfectly”, with an average price of RMB16 per tablet (vs. only
c.RMB10 for other domestic Entecavir tablets). (See Exhibit 7 for tender prices of
Dawnrays’ Leiyide vs. Sino Biopharmaceutical’s Runzhong in 2015-17)
2) Leiyide has export sales to developed countries/regions. The company has
been supplying entecavir tablets in Hong Kong market through its distribution
business partner GlaxoSmithKline since 2014.
3) Leiyide is the only entecavir produced as a cyclodextrin inclusion compound,
which help enhancing bioavailability. Moreover, Leiyide has a longer shelf life of 36
months (vs. 24 months for Sino Biopharmaceutical’s Runzhong).
Exhibit 1: Leiyide to accelerate growth after BE test and sales restructuring
Source: Company, CIRL estimates
-100%
-50%
0%
50%
100%
150%
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017E 2018E 2019E
Sales of Leiyide (RMB mn) Growth rate (% YoY)
Page 3 of 21
Sales restructuring of Leiyide was completed by 2Q17
In Jul 2016, the company terminated the agency contract with its master agency for
the sales of Leiyide in China, as the master agency was acquired by an SOE and did
not purchase the company’s products in 2Q16. The company had completed sales
restructuring for Leiyide by 2Q17 and the product saw a growth recovery in 1H17, with
sales amounting to RMB100mn in 1H17 vs. RMB40mn/RMB67mn in 1H16/2H16.
Despite a higher selling ratio for Dawnrays after the termination of a master agency,
we are positive to this change in sales strategy for Leiyide due to:
1) The termination of a master agency is essentially cutting off a layer of
distribution from manufacturer/Dawnrays to hospitals/patients. According to
management, the company could raise the ex-factory price of Leiyide to
distributors at provincial level, whereas distributors could purchase products
directly from Dawnrays at a discount. This creates a win-win situation for
Dawnrays and distributors.
2) Dawnrays has more resources to develop the product in a long-term and
strategic approach vs. agency’s short-termism. According to management,
the company currently has 200 sales representatives for Leiyide responsible for
academic promotion, marketing, and hospital coverage expansion for Leiyide.
3) The sales mode is now more of a direct sales model, in the sense that
Dawnrays has more control in distributors’ inventory level and intelligence in
terminal sales. The company had completed the restructuring of sales for Leiyide
by 2Q17 and its sales jumped 152% YoY to RMB100mn in 1H17.
Background: HBV therapeutics and the standard of care in China
Hepatitis B is a potentially life-threatening liver infection caused by the hepatitis B
virus (HBV). According to US CDC, approximately 95% of infants and 25-50% of
children aged 1-5 years will remain chronically infected with HBV, and long-term
complications of HBV infections include cirrhosis and liver cancer. In 2015, WHO
formulated guidelines for the treatment of chronic hepatitis B infection and
recommended the preferred use of nucleos(t)ide analogues i.e. Tenofovir or Entecavir,
which have a high barrier to drug resistance, for the first- and second-line treatment.
The treatment only suppresses the replication of HBV and does not cure hepatitis B
infection. Entecavir is off-patent while Tenofovir is protected by a patent until 2018 in
most developed countries.
According to WHO, an estimated 90mn people in China currently have chronic
hepatitis B, with 28mn needing treatment and 7mn requiring urgent treatment due to
advanced liver disease and the high risk of developing cancer. Despite an improving
trend on incidence thanks to HBV vaccination (free to all infants since 2005), China’s
incidence rate was still at 68.6 per 100,000 population in 2015, almost 6x the rate in
the US. The number of new cases of hepatitis B in China was 0.93-0.94mn each year
in 2014-16 vs. 19,200 in US in 2014, according to data compiled from Chinese CDC
and US CDC.
The current HBV therapeutics in China include i) nucleoside/nucleotide antiviral