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See important disclosures, including any required research certifications, beginning on page 53
2 September 2013
Initiation: finding the formula
• We expect the Taiwan Healthcare Sector to double its share of the local market’s capitalisation over the next three years
• Progress on drug development, co-development pacts, and out-licensing agreements are potential share-price catalysts
• Favour companies with strong management and late-stage pipe-lines; TTY Biopharm rated Buy (1), Scinopharm Outperform (2)
Taiwan Healthcare Sector
Health Care / Taiwan
Positive (initiation)
Neutral
Negative
How do we justify our view?How do we justify our view?
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Taiwan Healthcare Sector 2 September 2013
Finding the formula ...................................................................................................................... 5
Sector valuation ......................................................................................................................... 5
Market cap has more than tripled in the past 10 years ........................................................... 6
Total earnings should expand ................................................................................................... 7
Key industry trends .................................................................................................................. 8
TWi Pharmaceuticals (4180 TT, TWD257.82, Not rated) ......................................................... 15
TaiGen Biotechnology (4157 TT, TWD44.91, Not rated) ........................................................... 18
Taimed Biologics (4147 TT, TWD79.60, Not rated) ................................................................ 20
Taiwan Liposome Company (4152 TT, TWD344, Not rated) ................................................... 22 Company Section
TTY Biopharm ......................................................................................................................... 25
ScinoPharm Taiwan ................................................................................................................ 37
Contents
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See important disclosures, including any required research certifications, beginning on page 53
■ Investment case We initiate coverage of the Taiwan Healthcare Sector with a Positive rating. We expect the sector to see more capital injections in the coming years, with several pharmaceutical players now planning to list on the stock market or raise funds on the market. At the same time, we expect the major players to make progress in meeting key milestones in drug development. In our view, these two factors should help propel the sector’s share of the Taiwan market’s capitalisation to 7% in 2015, from 3.5% currently. We are one of the first non-Taiwan analysts to offer a comprehensive report on the Taiwan Healthcare Sector. Alongside our initiations on TTY Biopharm (4105 TT, TWD99.70, Buy [1]) and Scinopharm Taiwan (1789 TT, TWD83.80, Outperform [2]), we include four smaller players that are exposed to these key trends:
• Trend 1: According to forecasts by IMS Health, emerging markets are expected to see a 14% CAGR in pharmaceuticals revenue over
2012-16, compared with a 5% CAGR globally.
• Trend 2: Cancer treatments are a key focus for Taiwan’s pharmaceutical companies, whose goal is to develop drugs that are more effective than current treatments and have fewer side effects. Compared with the big global players, we think the Taiwan players have strong R&D, can easily shift their strategic plans, and have good links to Asian markets (especially China).
• Trend 3: According to IMS Health, generic drugs should see a higher revenue CAGR (11%) than the pharmaceutical market as a whole over 2012-16. We favour companies that focus on developing generics in fields with relatively high barriers to entry.
• Trend 4: With patents on major biosimilars, also known as follow-on biologics, due to expire in the coming months, some companies in Taiwan are aggressively expanding their production capacity and skills in this field.
The Taiwan Healthcare Sector generated USD1.5bn in net profit in 2012, up 28% YoY and more than double the 2002 figure. As several Taiwan Healthcare firms have drugs in the late stages of development, we forecast a double-digit CAGR in their earnings over 2013-15. ■ Catalysts We would see the following developments as share-price drivers:
• Progress in meeting drug-development milestones, and announcements of co-development pacts and out-licensing agreements, particularly with top-tier global players.
• IPOs and fund-raising activities by Taiwan’s pharmaceutical companies.
• New policies and regulations that encourage drug development.
■ Valuation According to our research, the Taiwan Healthcare Sector’s forward PER peaked at 25x before the financial crisis in 2008, fell to around 10x during the crisis, and has since been at around 15x. Its valuation does not appear excessive in a historical context or relative to the US healthcare segment (20x). ■ Risks Risks to our view would include: 1) fewer-than-expected drugs securing regulatory approval, and 2) a weaker-than-expected stock-market sentiment, prompting healthcare companies to delay planned IPOs and fund-raising activities.
2 September 2013
Initiation: finding the formula
• We expect the Taiwan Healthcare Sector to double its share of the local market’s capitalisation over the next three years
• Progress on drug development, co-development pacts, and out-licensing agreements are potential share-price catalysts
• Favour companies with strong management and late-stage pipe-lines; TTY Biopharm rated Buy (1), Scinopharm Outperform (2)
Taiwan Healthcare Sector
Key stock calls
Source: Daiwa forecasts.
Health Care / Taiwan
Positive (initiation)
Neutral
Negative
Christine Wang(886) 2 8758 6249
New Prev.TTY Biopharm (4105 TT)Rating BuyTarget 120.00Upside 20.4%
ScinoPharm Taiwan (1789 TT)Rating OutperformTarget 90.00Upside 7.4%
How do we justify our view?How do we justify our view?
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Taiwan Healthcare Sector 2 September 2013
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How do we justify our view?
Growth outlook
Valuation
Earnings revisions
Growth outlook Global pharmaceutical market by 2016
Revenue for the global pharmaceutical industry is expected to grow to USD1.2tn by 2016, from USD1.0tn currently, according to IMS Health, a provider of technology and services to the healthcare industry. IMS Health forecasts emerging markets to account for 30% of revenue in the global pharmaceutical market by 2016, up from 20% in 2011. It forecasts emerging-market pharmaceutical sales totalling USD345bn in 2016, in line with the figure for the US, which is currently the world’s largest market for pharmaceuticals.
Source: IMS Health
Valuation Taiwan Healthcare Sector: one-year forward PER
Based on the market capitalisation of healthcare-related stocks on Taiwan’s Taiex and OTC markets, we have calculated the Taiwan Healthcare Sector’s forward PER over the past 10 years. Its forward PER peaked at 25x just before the financial crisis in 2008, fell to around 10x during the crisis, and has since been steady at around 15x. Hence, the sector’s prevailing valuation does not appear excessive in a historical context or relative to the 20x forward PER for the US healthcare segment.
Source: TEJ
Earnings revisions Earnings revisions: Scinopharm and TTY Biopharm (TWD)
The Bloomberg consensus forecasts for Scinopharm and TTY Biopharm incorporate estimates from only three analysts. After being little changed for six months, the consensus forecast for TTY Biopharm’s 2014 earnings was revised up in June 2013, likely on the market’s expectation that new drug approvals were imminent. The consensus forecast for Scinopharm is largely unchanged since 2012.
Source: Bloomberg
Positive (initiation)
Neutral
Negative
(10% )
(5% )
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20%
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Spending CAGR2012 - 2016E
(Spending CAGR 2007 - 2011 )
SpecialtyTraditional
USD50bnUSD25bn USD5bn
oncologics(TLC、TTY、ScinoPharm)
Antidiabetics(TLC)
Vaccines
Multiple Sclerosis
Autoimmune
ADHD(TWi Pharma)
Contraceptives
Asthma/COPD
Cephalosporins (TaiGen)
Anti-Epileptics
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TTY Biopharm Scinopharm
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Taiwan Healthcare Sector 2 September 2013
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Investment thesis We are Positive on the Taiwan Healthcare Sector for the following reasons:
• By the end of 2015, we estimate the sector will account for more than 7% of the local market’s capitalisation, compared with 3.5% currently.
• Many Taiwan healthcare companies have listing or fund-raising plans in 2013 and 2014. We believe these activities, together with news flow showing progress in drug development, will spur interest in the sector.
• Several Taiwan pharmaceutical/biotech companies have drugs in PhaseII and III clinical trials. While there are no guarantees that these drugs will be commercialised, we believe there are clear signs of progress in drug development.
• We expect further news of co-development pacts or out-licensing agreements, which should raise the sector’s profile.
Below we highlight four trends within the sector that we think Taiwan players are well-positioned to benefit from:
• Trend 1: Emerging markets are forecast to see a 14% CAGR in pharmaceutical revenue in 2012-16, compared with 5% for the overall industry, according to IMS Health.
• Trend 2: Cancer treatments are now the main focus for Taiwan pharmaceutical players.
• Trend 3: Generics are forecast to deliver higher revenue growth (11% CAGR over 2012-16) than the overall pharmaceutical market.
• Trend 4: Biosimilars are a hot topic because of the patent cliff. Valuation and ratings Taiwan healthcare companies generated cumulative net profit of TWD45bn in 2012, up 28% YoY and more than double the figure of 10 years ago. We forecast a double-digit earnings CAGR over 2013-16. The sector’s forward PER peaked at around 25x just before the financial crisis of 2008 and fell to around 10x during the crisis. It has since been steady at around 15x, which does not look excessive in an historical context or compared with the US healthcare sector (20x forward PER). We favour companies with a focus on developing generic drugs, as the entry barriers to this segment are relatively high. In this report, we initiate coverage on TTY Biopharm and Scinopharm, and provide summaries for three other listed companies and one that plans to list in 2014.
The Taiwan Healthcare Sector looks set to grow in importance in the coming years We forecast the sector to deliver a double-digit earnings CAGR over 2013-16. Valuations look reasonable
Executive summary
Finding the formula
We believe that the Taiwan Healthcare Sector is promising in terms of product development and will draw more funds from the market and interest from investors.
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Taiwan healthcare companies in this report Company Ticker Mkt cap (USDm) Daily turnover (USDm) Rating TP (TWD) Focus TTY Biopharm 4105 TT 780 4.11 Buy 120 Generics and cancerScino Pharm 1789 TT 1,890 5.83 Outperform 90 Generics and cancerTwi Pharma 4180 TT 855 1.68 Not rated Generics TaiGen Biotech 4157 TT 987 22.3 Not rated Infectious,China Taimed Biologics 4147 TT 516 1.34 Not rated AIDS,Biologics TLC 4152 TT 622 3.21 Not rated Generics
Source: Bloomberg, Company data, Daiwa research
Stock picks We rate TTY Biopharm Buy (1). The company began contract manufacturing for global top-tier customer Johnson & Johnson (J&J) in 2H13, and its earnings could get a boost if, as we expect, it starts to receive royalty income from its subsidiary, PharmaEngine, in 2014. We have an Outperform (2) rating on Scinopharm, largely due to its strong pipeline of cancer-related active pharmaceutical ingredients (APIs). We believe its contract-manufacturing business will drive long-term earnings, and expect its new injectable capacity to accelerate earnings growth from 2017.
Our two stock picks have a combined market cap of more than USD2.6bn, focus on cancer treatments, and have potentially strong pipelines.
Source: Daiwa forecasts
Sector stocks: key indicators
Share
Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg
ScinoPharm Taiwan 1789 TT 83.80 Outperform 90.00 2.118 2.595
TTY Biopharm 4105 TT 99.70 Buy 120.00 3.724 5.900
Rating Target price (local curr.) FY1
EPS (local curr.)
FY2
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Taiwan Healthcare Sector 2 September 2013
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Finding the formula
Sector valuation
US Biotechnology Index We use the S&P 500 Biotechnology Index to arrive at valuations for the global biotech companies because the US pharmaceutical market is the biggest (in terms sales) in the world and has the most established capital markets from which its healthcare industry can raise funds. Following the collapse of the global stock markets in 2008, the index PER dropped sharply from around 25x before the crisis to around 10x in 2009, due to the high earnings posted by the US healthcare companies and the collapse in their share prices. However, the index PER has been gradually rising since late 2011, as many well-known generic drugs in the US sector head toward the patent cliff. We expect the index to maintain a high earnings growth rate over the next two years on the back of expectations for the next patent cliff for biosimilars –and also triggered by acquisitions by big companies of small companies in the next five years or so. This should help big pharma companies to continue to deliver high earnings growth. Currently, the US healthcare companies are trading at close to an average one-year forward PER of 30x, which is still lower than the past-10-year average PER of 40x (based on the S&P Industry), driven by their high earnings and low share prices. S&P Biotech index and PER
Source: Bloomberg
Taiwan Healthcare Sector’s valuation does not look stretched We added up the market caps of all the healthcare-related stocks listed on the TAIEX and OTC, and derived a forward PER for the sector for the past 10 years. The forward PER peaked at 25x just before the financial crisis in 2008, falling significantly during the crisis to only around 10x. Since then, the sector valuation has stayed relatively steady at around 15x, which does not appear excessive to us. Taiwan Healthcare Sector: one-year forward PER
Source: Bloomberg
Note: For 2013 earnings, we apply a growth rate of 10% YoY, roughly equal to the sector’s CAGR of 9% in net income from 2003-12.
US healthcare companies share prices vs. those of their Taiwan counterparts
Source: Bloomberg, TEJ
From the preceding chart, we can see that the share prices for the Taiwan Healthcare Sector are positively correlated with those of the US sector. Currently, the Taiwan Healthcare Sector’s one-year-forward PER is trading at a 25% discount to that of the US sector, and we expect the gap to narrow in 2H13.
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US Health Care Sector Mkt Cap Growth
Taiwan Health Care Sector Mkt Cap Growth
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US healthcare stocks: premium over Taiwanese peers
Source: Bloomberg, TEJ
US/Taiwan healthcare stocks: relative performance to their home markets
Source: Bloomberg, TEJ
Market cap has more than tripled in the past 10 years
On an absolute value basis, the market cap of all the listed Taiwan healthcare stocks has more than tripled over the past 10 years to around USD30bn in aggregate. In addition, the total healthcare sector market cap accounts for 3.5% of the total market currently, up from 2.2% in 2003. In our view, this number will increase as more companies are listed over the next few years. We estimate the healthcare market cap to reach USD61bn, and account for 7.4% of the total market in three years’ time.
Market cap of Taiwan healthcare stocks vs. total market
Source: Bloomberg
We expect the Taiwan pharma companies to raise a total of about TWD10bn (~1.2% of the current TAIEX market cap) in 2013. This amount excludes the amount that would potentially be raised through IPOs. Fundraising plans of new drug companies
Company Ticker Market Listing date
Planned size of follow-on offering
(TWDm) in 2013Price/share
(TWD) Medigen 3176 OTC 2011/11/23 1,280 160PharmaEngine 4162 OTC 2012/9/18 1,733 140GlycoNex 4168 OTC 2012/12/18 1,703 80Taiwan Liposome 4152 OTC 2012/12/21 2,980 298OBI 4174 ROTC 2012/12/12 1,500 158Mycenax 4726 ROTC 2008/10/30 Filed for IPO in JuneTWi Pharma 4180 ROTC 2012/11/5 Filed for IPO in June
Source: Company
We list the planned IPOs in the next three years in the table below. Although most of the current market caps look small on the emerging board, we believe there is the potential for the market cap of a few companies to exceed USD1-2bn once they are listed on the main board.
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Potential healthcare IPOs in Taiwan Potential listing date
Company Ticker
Listed on emerging
board Mkt Cap (USDm) 2013 2014 2015
2015beyond
TaiGen BioPharma 4157 13-Aug 987 x Twi Pharmaceuticals Inc 4180 12-Nov 847 x Obi Pharma Inc 4174 12-Dec 822 x Taimed Biologics Inc 4147 10-Jun 519 x Orient Pharma Co Ltd 4166 12-Jun 291 x Mycenax Biotech Inc 4726 8-Oct 230 x TCI Co Ltd 8436 12-Feb 176 x Scivision Biotech Inc 1786 10-Dec 130 x I-See Vision Technology Inc 4184 12-Dec 106 x Taiwan Advance Bio-Pharma 4186 12-Nov 106 x Tcm Biotech International Co 4169 12-May 82 x Golden Biotechnology Corp 4132 10-May 81 x Dyaco International Inc 1598 11-Oct 77 x Arich Enterprise Co Ltd 4173 12-Jul 77 x Innopharmax Inc 4172 12-Sep 72 x Maxigen Biotech Inc 1783 11-May 61 x Medfirst Healthcare Services 4175 12-Dec 57 x Johnson Chemical Pharma 4747 10-Jan 54 x Body Organ Biomedical 4177 11-Oct 46 x Genereach Biotech 4171 12-Nov 46 x Allied Biotech Corp 1780 10-Apr 40 x Unicon Optical Co Ltd 4150 10-Sep 36 x Vectorite Biotech Inc 4170 13-Apr 34 x General Biologicals Corp 4117 2-Jul 26 x Ebm Technologies Inc 8409 10-Apr 16 x Eps Bio Technology Corp 4183 12-Nov 11 x Gwowei Technology 4734 8-May 7 x SynCore Biotech * 13-Aug n.a. x PharmaEssentia * 13-Nov n.a. x Source: Companies, Daiwa
Note: * ticker not currently available.
Total earnings should expand
Overall, Taiwan healthcare companies generated around TWD45bn (around USD1.5bn) in net profit in 2012, a rise of 28% YoY. This number is more than double the sum they generated 10 years ago. By 2016, IMS Health forecasts the global pharmaceutical industry to grow to USD1.2tn in sales, from USD956bn in 2011. Mr. Wong Chi-Huey, the president of Academia Sinica, the top academic institution in Taiwan, expects Taiwan to account for 1% of global pharma sales by 2016, from USD3bn in 2013, which translates into USD10bn. Compared with the semiconductor industry in Taiwan, which accounts for 60-70% of the global market, 1% for the healthcare industry does not look high, and could be achievable in the future, in our view.
Total annual net profit of Taiwan healthcare companies
Source: TEJ
Healthcare as a percentage of GDP is still small compared with developed countries In terms of the healthcare contribution to GDP in Taiwan, pharmaceutical manufacturing has grown at a CAGR of 5.5% over the past decade since 2001, higher than overall GDP growth of 4.5%. GDP contribution by pharmaceutical manufacturing sector
Source: National Statistics of Taiwan, Daiwa
However, while the total pharmaceutical-related contribution to GDP has risen from 2.5% of total GDP in 1981 to 4.6% in 2011, it still only accounts for a small fraction of total GDP. Healthcare as a percentage of Taiwan GDP
Source: National Statistics of Taiwan
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In addition, this number (5% of GDP) is only slightly higher than that for India, but lower than for China, and lower than for other developed countries, such as the US (around 17%), the UK, Japan and Korea. This indicates that there is still much room for the Taiwan healthcare industry to grow. Healthcare expenditure (% of GDP) by country
Source: The World Bank
Key industry trends
We illustrate a few of the key industry trends that we see for the Taiwan Healthcare sector. Key industry trends
Trend Growth drivers 2011
sales (USDbn)
2012-16E sales CAGR
Taiwan beneficiaries
1 Higher pharma revenue growth for the emerging markets
207 14% Scinopharm, TTY Biopharm, TaiGen
2 Development of cancer treatments 47.2 16% Scinopharm, TTY Biopharm,
CHC
3 Penetration rate for generic drugs to increase 242 11% Scinopharm, TTY Biopharm,
TLC, TWI
4 Biosimilars are a hot topic because of the patent cliff 4.6 20% TTY Biopharm
Source: IMS Health, Daiwa
Trend 1: emerging markets Sales for the global pharmaceutical industry are expected to expand to USD1.2tn by 2016, at a CAGR of 4.7% for 2012-16, according to IMS Health. The growth should be mainly driven by market expansion in emerging countries as well as by increased sales of generic drugs. IMS Health estimates that the emerging markets will deliver a CAGR as high as 14% over the same period, much higher than that for the global market, primarily driven by improving infrastructure and more people getting more access to better medicine. IMS Health expects emerging markets to account for 30% of the global pharmaceutical market over the next five years, which would be as large as the biggest market – the US.
Global pharmaceutical spending by country (2011)
Source: IMS Health Market Prognosis, May 2012
Emerging markets (USDbn) Sales in 2011 Projected sales in 2020 CAGR
China 67 176 11%Brazil 26 57 9%Russia 21 45 9%India 16 49 14%Fast followers 77 172 9%
Source: Business Monitor International
In terms of spending by country, IMS Health expects the US to remain the largest drug market in 2016. However, it also sees Japan being overtaken by China as the second-largest pharmaceutical market, while Brazil climbs to fourth position, followed by Germany, France and Italy. This could create another opportunity for Taiwan healthcare companies, other than relying on the most focused market – the US. Global pharmaceutical spending by country (2016)
Source: IMS Health Market Prognosis, May 2012
Note: Emerging markets include China, Brazil, India, Russia, Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and Vietnam.
Trend 2: cancer is the main focus In terms of spending by therapeutic area, cancer is expected to remain the top spending category by 2016, followed by anti-diabetes, asthma, autoimmune diseases and lipid regulators.
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(USD bn)
U.S. 31.0%
Canada 2.0%
EU 13.0%Rest of Europe
5.0%Japan 10.0%
South Korea 1.0%
Pharmerging 30.0%
Rest of the world 8.0%
2016E - Market size: USD1,205bn
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Healthcare spending by therapeutic class in 2016
Source: IMS Health Market Prognosis, May 2012
As such, investment naturally flows to the top-spending categories. In terms of investment by therapeutic area, cancer is the most invested area with 948 medicines under development in the US, followed by respiratory disorders, mental disorders and cardiovascular drugs (as of 2012). Number of medicines under development in 2012: select categories
Source: PhRMA (Pharmaceutical Research and Manufactures of America) industry profile 2012; Note: reflects number of compounds in clinical trial or under review by FDA; rare diseases are those affecting 200,000 or fewer people in the U.S.
Geographically, the US is the largest market for cancer drugs, with a market share of 43% in 2009, followed by the top-5 EU markets at 24%, according to Frost & Sullivan. As such, many of Taiwanese healthcare companies are also focused on cancer-related drug development/ R&D and distribution of related medical devices used in the treatment of cancer. Trend 3: generics market set to outgrow the overall pharmaceutical market In terms of sub-segments, innovative/biotech drugs accounted for the majority of total pharmaceutical sales in 2011 (at 82%), followed by over-the-counter (OTC) (10%) and generic drugs (8%).
Pharmaceutical market sub-segments (2011)
Source: IMS Health Market Prognosis, May 2012
We list below the generic drug development process. Generic drug development process
Source: Daiwa research
Generic drugs, though, remain relatively small compared with innovative/biotech drugs, and are expected to account for 11% of total prescription drug sales by 2018, up from 6% in 2004 and 10% in 2012. Worldwide prescription drug sales (2004-18E)
Source: EvaluatePharma (May 2012); Sales to 2011 based on reported sales data of top 500 pharmaceutical and biotech companies
Furthermore, IMS Health forecasts global spending on generics to grow to USD400-430bn in 2016 from USD242bn in 2001, representing a CAGR of 11%, surpassing the growth expected for branded drugs.
0 10 20 30 40 50 60 70 80 90
Oncologics Antidiabetics
Asthma/COPD Autoimmune
Lipid Regulators Angiotensin II HIV Antivirals
Antipsychotics Vaccines
Immunostimulants Anti-Ulcerants Anti-Epileptics
Multiple Sclerosis Platelet Aggregation Inhibitors
Narcotic Analgesics Immunosuppressants
Contraceptives Cephalosporins
Antivirals, excl HIV
(USDbn)
948
398255 252 212
141 139 132 88 85 85 72 24
460
0
200
400
600
800
1,000
Canc
er
Resp
irato
ry d
isor
ders
Men
tal d
isor
ders
Card
iova
scul
ar
Diab
etes
mel
litus
Lung
can
cer
Leuk
emia
Brea
st c
ance
r
HIV/
AIDS
Colo
rect
al c
ance
r
skin
can
cer
Alzh
eim
er's
dise
ase
Park
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n's d
isea
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Rare
dis
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s
OTC 10.0%
Generic drugs 8.5%
Innovative/Biotech drugs
81.5%
File ANDA Request for
plant Bioequvalence
review Labelingreview
Chemistry &Micro review
Regulatoryapproval
5.9%
8.2%9.9%
10.6% 10.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
200
400
600
800
1,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
E
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
(USDbn)
Generics (LHS)Prescription drugs excl. generics (LHS)Generics as % of total (RHS)
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Taiwan Healthcare Sector 2 September 2013
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Global spending in 2011 and 2016E
Source: IMS Health Market Prognosis, May 2012
In our view, the growth of generic-drug sales will be fuelled by the growth of emerging markets, the upcoming expiration of patents for blockbuster drugs, as well as governments increasingly looking for more cost-effective treatments. The ‘patent cliff’ is one of the major factors that should drive the expansion of generics. The patent cliff occurs when drugs’ patents expire and subsequently sales of the drugs experience an abrupt drop. This phenomenon is particularly severe for blockbuster products, which are generally defined as products with total revenue of over USD1bn worldwide. The patent cliff puts a lot of pressure on the profitability of the pharmaceutical companies. The major examples include Pfizer’s Lipitor and Effexor, and Merck’s Cozaar and Singulair. Market size estimates of patent expiration drugs
Source: EvaluatePharma
The line between generics and branded drugs is becoming blurred. According to EvaluatePharma, the major pharmaceutical companies accounted for around 50% of prescription drug sales, with the top-20 accounting for almost 68% as of 2011.
Worldwide prescription drug sales (2011): top-20 companies Prescription sales (USDbn) Market share (%)
Pfizer 53.5 7.5 Novartis 46.7 6.5 Merck & Co. 41.9 5.9 Sanofi 39.3 5.5 Roche 37 5.2 GlaxoSmithKline 34.9 4.9 AstraZeneca 32.4 4.5 Johnson & Johnson 22.3 3.1 Abbott Laboratories 22.4 3.1 Eli Lilly 20.4 2.9 Bristol-Myers Squibb 16.9 2.4 Teva Pharmaceutical 15.7 2.2 Amgen 15.3 2.1 Takeda 14.7 2.1 Boehringer Ingelheim 14.1 2.0 Bayer 13.4 1.9 Novo Nordisk 12.4 1.7 Astellas Pharma 11.2 1.6 Daiichi Sankyo 10.5 1.5 Gilead Sciences 8.1 1.1 Subtotal (Top-20 companies) 483.1 67.5 Total worldwide sales 715.7
Source: EvaluatePharma
Note: Brands defined using IMS Health’s proprietary market segmentation methodology and include vaccines, but exclude branded generics. Generics are defined as unbranded generics and branded generics, but exclude OTC. Other products include OTC, diagnostics and non-therapeutics.
However, many of these pharmaceutical companies have entered the generics segment. Major examples include: Pfizer establishing subsidiaries to engage in the generics business; and Novartis’ major generics business, Sandoz, being the world’s second-largest generic drug company as of 2011. GSK also entered the branded generics space through an alliance with South Africa’s Aspen Pharmacare Holdings in 2008 to accelerate its sales growth in the emerging markets and further extended its relationship through the purchase of an ownership stake in Aspen Pharmacare in 2009. Top global generics drug companies 2011 (sales and growth rate)
Source: EvaluatePharma
Notes: Sales in 2011 based on company reported data (Aspen based on forecast data for 2011)
596
242
118
615 - 645
400 - 430
130 - 160
0
100
200
300
400
500
600
700
Brands Generics Other
(USDbn)
2011 2016E
8 11 11
13
20
13 10
12
18
33
21 18 19
17
21 19
0
5
10
15
20
25
30
35
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
E
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
(USDbn)
9.4 8.65.6
3.3 2.4 2.2 2.2 2.2 1.8 1.7
2% 11%
11%
46%19% 11% 8% 9% 12% 11%
0
2
4
6
8
10
Teva
pha
rmac
eutic
al
Nova
rtis
(San
doz)
Myl
an
Wat
son
Sano
fi
Daiic
hi S
anky
o
Hosp
ira
Acta
vis
Aspe
n Ph
arm
acar
e
STAD
A Ar
znei
mitt
el
(USD bn)
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Taiwan Healthcare Sector 2 September 2013
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In terms of the penetration of generic medicine by country, the UK has the highest penetration of 83% (as of 2011). Several developed countries, such as the US and Germany, also have high penetration of 60%+. However, Japan, for example, is still at 24% penetration, which is much lower than the UK and US. We expect generic penetration to increase in Japan and other parts of Europe in the future, which should lower the overall healthcare burden on governments. Penetration of generic medicine by country (2011)
Source: IMS Health
Companies that have exposure to generic drug development, especially in the higher entry barrier fields with less competition, should benefit the most from the expiration of patents on currently branded drugs. Taiwanese companies should leverage their strength on clinical trials and focus more on drug development, while this part of the development usually generates higher returns as well, compared to the new molecule discoveries and pre-clinical trials, in our view. Trend 4: biosimilars benefit from the next wave of patent cliffs Biosimilars are the generic form of biologics. IMS Health estimates global biologic drugs will face the patent cliff from this year, and that more than 90% of the patents will expire by 2020. This means that a market of around USD86bn would be available for biosimilar drugs.
Biosimilar market size could increase from 2013
Source: IMS Health
In addition, entry barriers for the manufacturing of biosimilar drugs are higher than those for generic drugs due to the need to control batch-to-batch consistency on the complex molecule structure (in that even the originator cannot guarantee batch-to-batch consistency) and prevent contamination. As such, some industry experts expect less competition compared with generic drugs. The key areas of focus of biosimilars sit in parallel to those of biologics, with cancer and diabetes being at the forefront of development. Core therapeutic areas for biologics
Source: IMS Health
Many of the emerging markets, including China, India, Brazil and Mexico, have developed their own regulatory pathways for biosimilars. However, they generally have lower barriers in terms of clinical trial requirements and regulatory control. Looser regulatory controls have in turn driven the development of biosimilars within the cancer and EPO markets in countries such as China.
17% 22%36%
64%76% 76%
86%
83% 78%64%
36%24% 24%
14%
0%
20%
40%
60%
80%
100%
U.K. U.S. Germany France Spain Japan Italy
Branded Generic
4.4
0.2 0.6 0.4 1.6
4.6
7
3.4
0
1
2
3
4
5
6
7
8
2008 2009 2010 2011 2012 2013E 2014E 2015E
(USDbn)
NovoSeven RemicadeNeumega Kogenate
EpogenProcrit AranespEnbrel
Erbitux BetaseronHumulin Novolin Intron A
Regranex Human growth hormone
Neupogen
BeneFIXInfergen
HumaLogNovoLog Rituxan Avonex
RebifCerezyme
Lantus Avastin
Neulasta Synagis Tysabri
Sandostatin LAR
15.9
15.8
12.5
7.6
7.3
5.0
3.1
2.0
1.5
16.5
0 5 10 15 20
Insulins
Anti-TNF
Oncology (Mab)
EPO
Multiple Sclerosis
CFS-G
Blood coagulation
Ocular antineovasc.
Antiviral (no-HIV)
Other
(USDbn)
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Taiwan Healthcare Sector 2 September 2013
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South Korea, in particular, is actively expanding in the biosimilar space. The early movers include Celltrion and Samsung Biologics (the biotech arm of Samsung Group). Celltrion has partnered with US-based Hospira to develop multiple MAb products, the first of which is inflixmab, a biosimilar of J&J’s Remicade. Celltrion has obtained approval for its inflixmab in Korea and submitted the application to the EMA in 2012. Samsung Biologics has also partnered with several Western pharmaceuticals companies, including Biogen and Merck, to develop biosimilars. Major biologics manufacturing investment activities in Singapore
Company Date of
announcement Investment
(USDm) Notes Amgen 2013 200 Initially focused on expanding its
manufacturing capability for monoclonal antibodies; completion expected in 2015
Novartis 2012 500 Completion expected in 2016 for the production of substances for drugs relating to cancer, respiratory, and auto-immune diseases
GlaxoSmithKline 2009 600 Commenced production in 2011 to produce vaccines
Roche/Genetech 2009 500 Commenced production in 2009. The site comprises microbial-cell and mammalian-cell facilities which manufacture innovative medicines
Source: Daiwa research
However, to-date, the commercial success of biosimilars is still elusive. The early movers in the biosimilar space are listed on the following table:
Major biosimilars and the developing companies
Brand name Generic name 2012 sales
(USDm) Developers
Aranesp Darbepoetin alfa 2,040 Dr. Reddy’s Laboratories: Cresp® launched in
India in 2010
Stada: Silapo® marketed in the EU, where it was authorized in December 2007 for anaemia
Enbrel Etanercept 7,963 Avesthagen: Avent™ in preclinical studies as of 2012 Cipla: biosimilar Etacept launched in India in 2013
LG Life Sciences: completed phase I of LBEC0101 in South Korea
Mycenax Biotech: TuNEX in Phase III in Taiwan and South Korea
Protalix Biotherapeutics: PRX-106 in preclinical studies
Shanghai CP Goujian Pharmaceutical: Etanar®, marketed in Colombia; Yisaipu, marketed in China
Epogen/Procrit/Eprex/Erypo Epoetin alfa 2,267 Hexal: Epoetin alfa Hexal marketed in EU
(authorized in August 2007)
Hospira: Retacrit® marketed in EU (authorized in December 2007)
Medice: Abseamed® marketed in EU (authorized in August 2007)
Sandoz: Binocrit® marketed in EU (authorized in August 2007)
Genotropin Somatropin 823 Sandoz: Omnitrope® marketed in EU (authorized in April 2006)
Herceptin Trastuzumab 6,317 Amgen, Synthon and Actavis: Global licensing agreement announced in July 2012 for clinical development and testing of biosimilar
BioXpress, Hanwha Chemical, Hospira, Pfizer, PlantForm, Stada: biosimilar in development
Humira Adalimumab 9,265 AET Biotech and BioXpress, Amgen, Boehringer Ingelheim, Fujifilm and Kyowa Hakko Kirin: biosimilar in development
Neulasta Pegfilgrastim 4,092 Hospira, Teva: biosimilar in development
Dr. Reddy's Laboratories: Peggrafeel® markted in India in 2011
Neupogen Filgrastim 1,260 Biocon and Celgene: Nufil marketed in India by Biocon, in active development by the JV
Ct Arzneimittel: Biograstim® marketed in the EU (authorized in September 2008)
Dr. Reddy's Laboratories: Grafeel marketed in India
Hexal: Nivestim™ marketed in the EU (authorized in June 2010)
Ratiopharm: Ratiograstim® marketed in the EU (authorized in Sep 2009)
Sandoz: Zarzio® marketed in the EU (authorized in Feb 2009)
Teva: Tevagrastim® marketed in the EU (authorized in Sep 2008)
Remicade Infliximab 8,215 Amgen, BioXpress, Hospira: biosimilar in development
Celltrion: Ramsima™ authorized to market in Korea in July 2012; applied for authorization in EU
Rituxan/MabThera
Rituximab 7,190 Amgen, BioXpress, Boehringer Ingelheim, Celltrion and Hospira, Merck, Pfizer, Roche, Sandoz, Stada: biosimilar in development
Dr. Reddy's Laboratories: Reditux® marketed in Bolivia, Chile, India and Peru
Probiomed: Kikuzubam® marketed in Bolivia, Chile, Mexico and Peru
Source: Genetic Engineering & Biotechnology News
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Taiwan Healthcare Sector 2 September 2013
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Comparisons across Asia
Government policy and investment Target/ forecast Advantage Disadvantage Attitude to clinical trial
Taiwan 1) National Development Fund to inject USD1.8bn in the next 6-10 years. 2) Second-generation National Health Insurance (NHI) might improve regulatory policies and penetration of generics. 3) Trade relations improved with the recently signed Economic Cooperation Framework Agreement (EFCA), and the Cross-Strait Cooperation Agreement on Medicine and Public Health Affairs could facilitate approvals on Taiwan drugs to the China market.
USD4.8bn by 2020 by GlobalData
1) More friendly capital market, which should help attract companies 2) Green channels with China, which will facilitate the selling of drugs to China
1) Strict drug pricing control. 2) Pricing difference between generics and branded drugs is small compared to other countries. This discourages original R&D companies. 3) Provider price-reimbursement gap to be addressed by separating dispensing from prescribing. 4) Challenges in intellectual property rights protection.
Positive
China 1) China has tightened its regulations in recent years. 2) In July 2012, the new licensing law allowed the authority to issue compulsory licenses to the domestic pharmaceutical companies for the manufacture of cheap generics for emergency or public interest. 3) The "Recruitment Program of Global Experts" (1000 Talent Plan) facilitated for the healthcare industry in China.
USD280bn in 2016, up from USD132bn in 2012, by Frost & Sullivan
1) Increasing R&D talent 2) Improving quality levels for drugs 3) Increased urbanization driving market growth.
1) Poor intellectual property protection. 2) Lack of English-speaking citizens in China. 3) Increasing labour costs.
Positive
Japan 1) Deregulation and more efficient new drug approval process to attract foreign investment and improve the competitiveness of Japanese players. 2) Target to increase generics penetration from 25% in 2012, to 60% in 2018.
USD105bn in 2020, up from USD89bn in 2012
1) One of the top pharmaceutical markets in the world in terms of market size.
1) Slow adoption of generic drugs due to the conservative attitudes of doctors and patients.
The government is working to ease the tedious regulatory process
Singapore 1) Singapore's Health Sciences Authority (HSA) is implementing a new drug development regulatory model to accelerate drug development. 2) USD2.9bnn spending in 2011-15 for biomedical research.
1) Fast, quality and world-class manufacturing industry. 2) Accelerating drug discovery through strong research and top scientific talent. 2) Gateway to other markets.
1) Hard to raise money on the capital market because of strict regulations on investing in the pharmaceutical industry. 2) Limited local resources for clinical trials
Positive
India Revised National Pharmaceutical Pricing Policy in 2011 negatively affected the industry. Clinical trials by foreign companies in India have slowed due to complicated regulations on new drug development.
USD82bn in 2020 by GlobalData
1) Home market advantage. 2) Rural market penetration and expanded access to healthcare attract big pharma investment. 3) Strong generic industry to expand to global markets. 4) Strategic consolidation under way.
1) Quality of manufacturing needs to improve. 2) Hard to compete in terms of low-end products and may face increasing threats from China in this space.
Tighten clinical trial regulation
Korea 1) Korea Food and Drug Administration (KFDA) introduced regulatory guidelines for biosimilars in 2009, and the government created a USD80m Biomedical Fund in the same year for biosimilar R&D. 2) Invested USD5bn for biosimilar research/ manufacturing cities in Osong and Daegu. 3) Revised drug pricing policy to reduce drug prices of 7,500 registers.
USD39bn in 2020 1) Rapid development of stem cell research. 2) Improved Intellectual Property Rights (IPR) to attract global big pharma companies. 3) Free Trade Agreements (FTA) with the US, EU and Japan also help attract global big pharma companies.
1) Relative lack of research talent when it comes to developing new drugs. 2) Companies have a lack of English speakers.
Positive
Source: Governments, Daiwa research
Market size vs. Taiwan companies’ positioning
Source: IMS Health, Daiwa
(10%)
(5%)
0%
5%
10%
15%
20%
(10%) (5%) 0% 5% 10%
Spending CAGR 2007 - 2011
Spending CAGR 2012 - 2016E
Global market CAGR 2007-2011: 6%
oncologics(TLC、TTY、ScinoPharm)
Immuno-stimulants
Antidiabetics(TLC)
HIV Antivirals(Taimed)
Vaccines
Immuno-suppressants
Multiple Sclerosis
Autoimmune
ADHD(TWi Pharma)
Contraceptives
Antiviarlsexcl HIV
Asthma/COPD
Narcotic Analgesics
Platelet AggrInhibitor
Angiotensin
Lipid Regulator
Anti-Ulcerants
Cephalosporins (TaiGen)
Anti-Epileptics
Global market CAGR 2012-2016: 3-6%
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Taiwan Healthcare Sector 2 September 2013
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Taiwan pharmaceutical supply chain
Company BBG code
Mkt cap (USDm)
Turnover (USDm)
2012 net profit (TWDm) Key product focus Major shareholders
National Development
Fund Management background API
ScinoPharm 1789 1,900 5.83 1,170 Cancer API Uni-President Enterprises v Syntex Pharmaceutical (sold to Roche in 2004)
PharmaEngine 4162 589 6.09 49 Cancer TTY BioPharm v n.a.
Everlight Chemical 1711 319 0.71 104 API for cardiovascular disease, cancer and prostaglandin Ting-Chuan Chen
n.a.
China Chemical 1701 209 1.58 64 Chronic cardiovascular diseases and metabolic disorders/CMO/CRO Hsun-Sheng Wang
n.a.
Standard chemical 1720 208 2.97 65 A variety of drugs that address symptoms such as high blood pressure Chin-Tsai Fan
n.a.
SCI Pharmtech Inc. 4119 158 1.18 56 Supplier for the intermediate of Belviq; finished
development of antidepressant API Mercuries & Associates Ltd
Switzerland-based Siegfried
Formosa Laboratories, Inc.
4746 130 1.30 (22) API of drugs such as Orlistat, Ulipristal, and Linezolid Cheng-Yu Cheng
DuPont, Roche
Generic
Twi Pharma 4180 808 1.68 (567) Paragraph IV generics Opulent Asset Holdings Ltd; Twi Pharma HLDGS
Andrx
TTY Biopharm 4105 764 4.11 136 Cancer, Infection Ta Wan Tech n.a.
Taiwan Liposome 4152 570 3.21 (146) Specialty generics as well as new drugs (New formulation/NCE)
Burrill Life Sciences Cap Fund
n.a.
Taimed 4147 516 1.34 (207) TMB-355 (HIV drug) in Phase II National Development Fund v Allergan; Merck Co. Y.S.H. 3705 395 1.05 108 A wide variety of generic drugs, such as Carvedilol Lee Fang-Jen n.a. Center Lab. 4123 190 1.37 111 Oral Liquid Drug (respiratory, gastrointestinal) Li Jung Tech n.a.
Lotus 1795 92 7.40 (77) Nervous/Psychiatric System, Respiratory System, Pain Relief Treatment Tung-Ho Lin
Bristol-Myers Squibb, Servier
New drugs
TaiGen 4157 987 22.3 40 Infectious diseases/ cancer and diabetes-related complications YFY Group (1907 TT)
Roche, Hoechst Marion Roussel
Medigen 3176 758 5.61 384 Cancer and Liver Diseases(mainly cancers) Products, influenza vaccine
Everspring Industry
NTU Hospital, Acer
China Rubber 2104 534 1.82 163 Orphan drug for Pompe disease Taiwan Cement The Koo family Microbio 4128 439 2.00 (13) Cancer/autoimmune drug Kuang Bo Corp n.a. Fountain Bio 4159 375 0.31 39 Development of monoclonal antibodies MicroBio United Biomedicals
Orient Pharma 4166 291 0.12 (198) New drug, ORADUR-ADHD, for ADHD is expected to enter phase III in 2013 Orient Europharm
Carlsbad Technologies; Elan Corporation
ADIM 4142 247 1.56 (471) Vaccine, such as H7N9 influenza vaccine National Development Fund v Chairman was former minister for the Ministry of Health in Taiwan
PhytoHealth 4108 223 1.04 (44) Orphan drug for ITP (Idiopathic thrombocytopenic purpura) Maywufa Co Ltd
NBM Taiwan
Mycenax 4726 230 1.20 (84) Biosimilar drug, TuNEX, in clinical trial in Korea and Taiwan
Center Labs (associate of TTY BioPharm) v Chairman same as TTY
Biopharm Panion & BF Biotech
1760 209 1.02 (23) Its product, Nephoxil®, aims to address hyperphosphatemia
Pan You Invs
n.a.
GlycoNex 4168 234 1.16 20 Cancer drugs that combines glycosphingolipid antigen and human monoclonal antibody technologies Taiwan Adv Bio-Pharm
Biomembrane Institute (TBI)
GBL 4130 132 1.04 56 Cardiovascular/Musculoskeletal Disease/CNS National Development Fund v Genelabs Technologies TSH Biopharm 8432 106 0.18 169 Cardiovascular/gastrointestinal/Auto-immune TTY BioPharm 56% owned by TTY Biopharm
Source: Company, Bloomberg, TEJ
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Taiwan Healthcare Sector 2 September 2013
- 15 -
TWi Pharmaceuticals (4180 TT, TWD257.82, Not rated)
Market cap: USD855m
Highlights
• The company’s business model in Taiwan focuses on the special generics field.
• The chairman has extensive experience in global patent litigation in the special-generics field.
• The company specialises in drug-formulation technology.
Overview
Founded in 2002, TWi Pharmaceuticals (TWi) is a specialty pharmaceutical company focused on the development, manufacture, and commercialisation of high-entry-barrier generic drugs (highly variable drugs/difficult to formulate/require unique manufacturing processes). In addition, the company develops new drugs (in-licensing high-potential drug candidates/new formulations/new indications). TWi’s founder and CEO, Chi-Ming Chen, was a co-founder and president of Andrx Corporation, a well-known US generic-drug company that produced controlled-release technologies and products. While he was CEO, Andrx had more than 50 issued/pending US patents and more than 20 ANDA submissions. Andrx was listed in 1996 and was sold to Actavis in 2006. TWi’s president, Calvin Chen, has a track record of investing in the biotech and pharmaceutical industries as well as operational experience working in biotech companies. Prior to joining TWi in 2009, he was the vice president at Taiwan’s YFY Biotech Management Company.
TWi: major shareholders Name % holding Management team 43.75%CDIB Venture Capital 2.89%Coland Holdings (4144 TT) 1.87%Development Intl Investment Company 1.28%GAINS Investment Corporation 1.03%Shin Sheng III Venture Capital 0.87%President Intl Development Corporation 0.85%
Source: Company; note: as of 31 July 2013
Business focus
• It has filed nine paragraph IV under Abbreviated New Drug Applications (ANDA) to the US FDA, one of which is first-to-file, representing a potential revenue opportunity of TWD3.3bn a year, according to IMS Health.
• The company develops generic drugs and has fewer than five competitors globally.
• Part of its business is to focus on drug category 505(b)(2) under the US FDA, which is for drugs made from new formulations of existing drug compounds. The approval process for these types of drugs is quicker and cheaper for the company.
• In the industry, formulations are regarded as one of the company’s key strengths.
• It sells its products only in the US market.
• For its new drug (small molecules) development business, it target to license out or co-develop with partners post phase I or II.
Pipeline
The company aims to file 3-5 ANDAs a year over the next three years.
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Taiwan Healthcare Sector 2 September 2013
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TWi: development pipeline and status
Target disease Type Partners
2012 US mkt
size Advantage Generic (USD m) Lidocaine Patch 5%
Postherpetic Neuralgia PIV Teva 1,296 Only 4 ANDA
applications so far
Dexlansoprazole DR Capsule
Gastroesophagea reflux disease PIV Teva 771
Strong market growth, TWi believes it has a good chance of winning an ongoing patent suit on its generic drugs.
Guanfacine ER Tablet
ADHD PIV Par 448 Obtained tentative FDA approval, est. launch in June 2015
Diltiazem HCI ER Capsule Antihypertensive PIII TBD 292 Non-PIV, but high
technical barriers Nifedipine ER Tablet
Hypertension; Angoma pectoris
PIII/PII Par 172 Non-PIV, but high technical barriers
Donepezil HCI ER Tablet Alzheimer PII/PI Boca 135 Non-PIV, but high
technical barriers Megestrol Acetate 125mg/ml Oral Suspension
Anorexia-Cachexia caused by AIDS
PIV (FTF)
Teva 82
Application process lasts for more than 2 years; no other competitors
Cyclobenzaprine ER Capsule
Skeketal muscle relaxants PIV TBD 46
Obtained FDA approval, but still in a legal dispute with the branded manufacturer
Zolpidem Tartrate Sublingual Tablet
Insomia PIV TBD 9 Limited competition
New drug Status AC-201 Type-II diabetes Phase II AC-201 Gout Phase II
AC-301 Retinopathy and bone metastasis
Preclinical
AC-301 Tumor Preclinical
AC-701 Lupoid rosacea Phase II
AC-701 Skin side effects to targeted cancer therapy
Phase II
Source: Company, market data from IMS Health
Note: FTF stands for first to file
TWi’s business model has not been reflected in its financial performance, as none of the generic drugs in its pipeline have been launched yet. The company’s current financial performance only reflects its CMO/CRO services as well as the amortised upfront payments collected as part of the out-licensing agreement with Teva Pharmaceutical on the three products in its pipeline.
TWi: revenue mix (2012)
Source: Company
Cash flow
• As at the end of 2Q13, TWi has TWD303m in cash on hand.
• The company’s investment in R&D varies from one year to the next (see the following table).
• The company targets to be listed on Taiwan’s OTC market in 4Q13/1Q14.
• The stock is trading currently at a PBR of 10.6x on 2012 BVPS.
TWi: R&D investment in the past five years 2008 2009 2010 2011 2012R&D expenses 18 49 174 288 621Revenue 216 349 366 304 355R&D as a % of revenue 9% 14% 48% 95% 175%
Source: Company
TWi: fundraising schedule Time Price/share Amount (TWDm)Mar-10 12.2 385 May-11 15.0 150 Mar-2012/May-2012 60.0 895 Nov-12 108.0 324
Source: Company
CMO -Divalproex
86.4%
CRO 4.6%
Licensing 5.4%
Other 3.7%
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Taiwan Healthcare Sector 2 September 2013
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Financial statements
Income statement (TWD m) 2007 2008 2009 2010 2011 2012 1H13Revenue 200 216 349 366 304 355 67Gross Profit 62 49 74 103 83 93 (11)Operating Profit 62 49 74 (155) (274) (621) (335)Non-Op Profit - - - (14) 39 54 12Pretax Profit 62 49 74 (168) (234) (567) (324)Net Income 59 51 71 (168) (234) (567) (326)EPS (TWD) 2.22 2 2.69 (2.90) (3.01) (5.75) (3.31) Margin (%) Gross Profit Margin 31.0 22.7 21.3 28.2 27.3 26.2 -16.6Operating Profit Margin 31.0 22.7 21.3 -42.3 -89.9 -175.1 -498.5Net Income Margin 29.4 23.8 20.3 -46.0 -76.9 -160.0 -484.0 YoY(%) Revenue 8.0 61.8 n.a. -16.9 16.6 n.a.Gross Profit -20.9 52.1 n.a. -19.6 11.9 n.a.Operating Profit -20.9 52.1 n.a. n.m. n.m. n.a.Pretax Profit -20.9 52.1 n.a. n.m. n.m. n.a.Net Income -12.6 38.4 n.a. n.m. n.m. n.a.EPS -12.6 38.4 n.a. n.m. n.m. n.a.
Source: Company
Balance sheet (TWD m) 2007 2008 2009 2010 2011 2012 1H13Cash 0.0 0.0 0.0 175.7 105.8 679.4 303.0 AR/NR 0.0 0.0 0.0 56.2 139.5 41.3 16.8 Inventory 0.0 0.0 0.0 33.3 55.5 51.1 60.1 Total current asset 0.0 0.0 0.0 284.4 319.8 983.5 402.2 Net fixed asset 0.0 0.0 0.0 361.7 415.3 454.3 780.2 Total asset 33.4 24.4 5.0 708.3 900.8 1,673.4 1,421.7
Short-term borrowings 0.0 0.0 0.0 0.0 60.0 0.0 50.0 AP/NP 0.0 0.0 0.0 55.9 78.9 150.8 6.5 Total current liabilities 0.0 0.0 0.0 152.6 255.9 233.8 204.1 Long-term debt 86.7 119.4 87.7 53.5 65.7 46.9 135.9 Total liabilities 88.5 120.7 87.7 206.1 328.2 315.3 378.5 Shareholder's Equity 502.2 572.6 1,358.1 1,190.0
Source: Company
Cash flow (TWD m) 2007 2008 2009 2010 2011 2012 1H13CFO 0.0 0.0 0.0 (93.6) (273.2) (185.2) (145.1)CFI 0.0 0.0 0.0 (48.0) (147.3) (391.5) (278.5)CFF 0.0 0.0 0.0 292.7 297.4 1,150.4 47.2 - share issuance 0.0 0.0 0.0 385.6 150.0 1,219.2 0.0 - debt issuance 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company
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Taiwan Healthcare Sector 2 September 2013
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TaiGen Biotechnology (4157 TT, TWD44.91, Not rated)
Market cap: USD987m
Highlights
• Could be the first Taiwan pharma company to launch a new drug in China (the drug is awaiting approval).
• Focused on the China market.
Overview
Taigen Biotechnology, founded in 2001, engages in R&D of ‘first-in-class’ and ‘best-in-class’ new types of drugs targeting infectious diseases. The company has operations in Taiwan, China and the US, with R&D, clinical development and sales and marketing capabilities. Close to 80% of its employees work in the R&D area. Founder, CEO and chairperson Hsu Ming-Chu was the founding director of the Biotechnology and Pharmaceutical Research Division of the National Health Research Institutes in Taiwan. Prior to her return to Taiwan, Dr. Hsu served as Research Director, Cancer and Virology at Hoffmann-La Roche, US, for more than 10 years. Many members of the management team also came from major pharmaceuticals companies, including Mitsubishi Tanabe Pharma, Takeda Pharmaceutical, Sandoz (Novartis), and Bristol-Myers Squibb. Major shareholders Name % holding Yuen Fong Yu (YFY) Group 36.5National Development Fund Executive Yuan/Yao-hwa Glass, China Steel, Taiwan Sugar)
32.2
Domestic institutional investor 11.2Foreign institutional investor 5.0
Source: Company
Business focus Focuses on new chemical compound (NCE) drug development. It either in-licenses or discovers new compounds from in-house research.
• Plans to out-license the marketing and manufacturing rights following Phase II or Phase III clinical trials.
• Might be the first Taiwan pharma company to meet the requirements of the China FDA’s Category 1.1 New Drug Rules and launch a new drug in China.
• Trades on Taiwan’s emerging board and plans to list on the OTC market in Taiwan in 4Q13.
Pipeline
• TaiGen has submitted a New Drug Application (NDA) for Nemonoxacin (a new antibiotic), to the Taiwan FDA and China FDA, with approvals expected in 1H14. Upon approval, the drug would become the first drug from Taiwan to meet the requirements of China FDA’s Category 1.1 New Drug. Drugs under this classification have to be NCEs that have not been marketed in any country in the world.
• For the China market, the company has signed an agreement with Zhejiang Medicine Company (ZMC,
浙江醫藥) to out-license the exclusive marketing and manufacturing rights of Nemonoxacin in China. In Taiwan, the company is currently planning to sell the drug itself.
• Burixafor is an own-discovered drug. TaiGen plans to license out the marketing and manufacturing rights following Phase II clinical trials in 2014 for China market.
• TG-2349 for the treatment of Hepatitis C is an own-discovered drug as well. The company has received a lot of interest in the drug from top international pharma companies, and may license out the exclusive marketing and manufacturing rights during Phase II clinical trials.
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Taiwan Healthcare Sector 2 September 2013
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Taigen: development pipeline and status Target disease Status Partners Terms
Nemonoxacin
Community acquired pneumonia (oral)
NDA submitted (Taiwan/China)
Zhejiang Medicine (China)
Taigen will receive an upfront payment of USD8m from ZMC and is entitled to milestone payments as well as royalties (7-11% of sales)
Diabetic foot infection (oral)
Phase II (US)
Burixafor Stem cell transplantation Phase II (US)
Chemosensitizer Phase II (China)
In discussions with potential out-licensing partners
TG-2349 (HCV protease inhibitor)
Chronic hepatitis C infection Phase II (US)
In discussions with potential out-licensing partners
Source: Company
Cash flow
• Taigen currently has a little over TWD300m in cash on hand. According to the company, its annual cash burn rate is around TWD300m.
Taigen: fundraising schedule Time Type of securities Deal size (USDm)
Prior to 2004 Common stock - Series A 37Mar-04 Common stock - Series B 38Jul-09 Common stock - Series C 37
Source: Company
Financial statements
Taigen: income statement (TWDm) 2010 2011 2012 1H13 Revenue 14.9 225.7 40.4 34.3 Gross Profit 3.4 196.8 28.3 27.0 Operating Profit (451.1) (215.9) (496.2) (178.7)Non-Op Profit (1,855.1) (126.9) n.a. 53.0 Pretax Profit (2,285.6) 42.8 (468.4) (125.7)Net Income (2,285.6) 42.8 (468.4) (125.7)EPS (TWD) (111.2) 0.14 0.8 (0.2) Margin (%) Gross Profit Margin 22.6 87.2 69.9 78.7Operating Profit Margin -3,026 -96 -1,227 -521Net Income Margin -15,334 19 -1,158 -366 YoY(%) Revenue -27.4 1,414.4 -82.1 -15.2Gross Profit -17.6 5,750.7 -85.6 -4.5Operating Profit n.m. n.m. n.m. n.a.Pretax Profit n.m. n.m. n.m. n.a.Net Income n.m. n.m. n.m. n.a.EPS n.m. n.m. n.m. n.a.
Source: Company
Taigen: balance sheet (TWDm) 2010 2011 2012 1H13 Cash 867.0 492.7 634.6 317.1 AR/NR 12.2 23.4 4.9 4.0 Inventory 0.0 0.0 0.0 0.0 Total current asset 923.1 551.2 678.3 566.1 Net fixed asset 11.5 14.2 12.4 12.9 Total asset 1,112.9 610.5 733.9 623.6 Short-term borrowings AP/NP 155.9 85.1 133.9 62.7 Total current liabilities 5,390.9 86.1 182.8 113.9 Long-term debt 0.0 0.00 0.0 0.0 Total liabilities 5,402.3 97.3 361.2 276.7 Shareholder’s Equity (4,289.3) 513.2 372.8 346.9
Source: Company
Taigen: cash flow (TWDm) 2010 2011 2012 1H13
CFO (196.4) (379.2) (141.4) (229.9)CFI (10.5) (17.7) (8.4) (108.9)CFF 235.3 11.5 (9.4) 86.1 - share issuance 0.47 0.0 293.6 86.1 - debt issuance 231.3 0.0 0.0 0.00
Source: Company
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Taiwan Healthcare Sector 2 September 2013
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Taimed Biologics (4147 TT, TWD79.60, Not rated)
Market cap: USD516m
Highlights
• The company focuses on new protein drugs.
• It licensed an AIDS drug from international top-tier biotech firm Genentech to sell in Taiwan. Currently, Taimed’s R&D is undertaken in part by an AIDS research team led by Dr. David Ho, who is a pioneer in HIV antiretroviral therapy.
• Financially supported in part by the Bill & Melinda Gates Foundation.
Overview
Founded in 2007, Taimed Biologics is engaged in the development of Ibalizumab (TMB-355). TMB-355 is a first-in-class monoclonal antibody viral entry inhibitor for the treatment of HIV/AIDS and was originally developed by Genentech and licensed to Taimed in 2007. The company is led by a management team that has scientific and business backgrounds. Its CEO, Dr. James Chang, was a former senior director, R&D partnering and technology assessment, for US company Allergan Pharmaceuticals. Taimed Biologics: major shareholders Name % holding
National Development Fund Executive Yuan 20.7 Hui Hung Investment Co Ltd 9.9 Jun Tai Creative Co Ltd 6.2 Ruentex Industries Ltd 6.2 Chang Nien-Yuen (CEO) 1.2 Lin Kan-Kun 0.8 Chen I-Cheng 0.1 Total 45.1
Source: Bloomberg
Note: as of 31 July 2013
Business focus
• The company aims to co-develop drugs with international partners for phase-III clinical trials, instead of out-licensing.
• Its earnings would come solely from royalty income if the drug were approved by the US FDA.
• It aims to be listed on the OTC market in Taiwan or the Taiwan stock exchange in 2014.
Pipeline
• TMB-355 is currently in phase II of a clinical trial and Taimed Biologics expects the key data to be generated by 3Q13, enabling it to provide more information to the potential co-development partners, and thus finalise payment terms.
• The company expects this new drug to be launched by 2016 at the earliest in the US.
• The company claims that TMB-355 has fewer side effects than other HIV treatments.
• In addition, Taimed Biologics recently entered in a CMO contract with Wuxi Appetec (藥明康德), a pharmaceutical, biopharmaceutical, and medical-device outsourcing company with operations in China and the US, to manufacture the new TMB-355 drug and a product for future clinical trials in China. Wuxi Appetec has experience in manufacturing high-entry-barrier specialty drugs.
Taimed Biologics: development pipeline & status
Target disease Status Partners TMB-355 HIV In-licensed from Genentech Intravenous injection Phase II (US, Taiwan) Subcutaneous injection Phase I (US, Taiwan) TMB-607/TMB-657 (protease inhibitor) HIV Entering phase I In-licensed from Ambrilia
Biopharma Tamiphosphor Influenza Research
Source: Company
HIV market overview According to Datamonitor, sales of antiretroviral drugs in the US and the five biggest markets in Europe amounted to USD13.3bn for 2011, with the US the largest market. It forecast the sales of antiretroviral drugs to reach about USD16bn in these markets by 2017.
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Taiwan Healthcare Sector 2 September 2013
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Forecast antiretroviral sales by country
Source: Datamonitor
Meanwhile, IMS expects the global HIV antiviral market to be worth USD22-25bn by 2016. World's top-selling HIV drugs Drug Company 2012 sales (USDbn) US approval Truvada Gilead Sciences 3,181.1 2004Atripla Gilead/ Bristol-Myers-Squibb 3,574.5 2006Reyataz Bristol-Myers-Squibb 2,827.0 2003Isentress Merck 1,515.0 2007Kaletra Abbott 1,013.0 2000Epzicom/Kivexa ViiV Healthcare 868.9 2004Viread Gilead Sciences 848.7 2001Combivir ViiV Healthcare 233.9 1997
Source: Thomson Reuters, US FDA, Daiwa
Currently, two principle approaches are being pursued in the HIV drug pipeline. The first is gene therapy, which aims to make a patient’s immune system resistant to HIV. The second is a strategy in which the HIV virus is stripped from human DNA and destroyed permanently by the immune system.
Cash flow and valuation
• As at 30 June 2013, Taimed Biologics had TWD69m in cash on its balance sheet. For 2011 and 2012, the company’s R&D expenses amounted to TWD224m and TWD223m, respectively.
• According to the company, the estimated cash-burn rate will be about TWD130m for 2013. It has no plans to raise funds this year.
• The stock is trading currently at a PBR of 13.8x on its 2012 BVPS.
Taimed Biologics: fundraising schedule Time Price/share (TWD) Amount (TWDm)Oct-07 10.0 200Dec-07 10.0 360May-08 10.0 310Mar-10 10.0 690
Source: Company
Financial statements
Taimed Biologics: income statement (TWD m) 2009 2010 2011 2012 1H13 Revenue - - - - -Gross Profit - - - - -Operating Profit (221) (283) (241) (244) (86)Non-Op Profit 0 44 36 37 2Pretax Profit (221) (238) (205) (207) (84)Net Income (221) (238) (205) (207) (84)EPS (TWD) (1.78) (1.23) (1.06) (1.07) (0.44)
Margin (%) Gross Profit Margin n.m. n.m. n.m. n.m. n.m.Operating Profit Margin n.m. n.m. n.m. n.m. n.m.Net Income Margin n.m. n.m. n.m. n.m. n.m.
YoY(%) Revenue n.m. n.m. n.m. n.m. n.m.Gross Profit n.m. n.m. n.m. n.m. n.m.Operating Profit n.a. n.m. n.m. n.m. n.m.Pretax Profit n.a. n.m. n.m. n.m. n.m.Net Income n.a. n.m. n.m. n.m. n.m.EPS n.a. n.m. n.m. n.m. n.m.
Source: Company
Taimed Biologics: Cash flow (TWD m) 2009 2010 2011 2012 1H13 CFO (171.3) (186.9) (134.4) (117.2) (63.4)CFI (0.8) (1.0) (7.3) (2.3) 54.0 CFF 0.0 690.0 0.0 7.1 3.5 - share issuance 0.0 690.0 0.0 0.0 0.0 - debt issuance 0.0 0.0 0.0 0.0 0.0
Source: Company
Taimed Biologics: income statement (TWD m) 2009 2010 2011 2012 1H13 Cash 270.1 763.5 624.3 509.3 69.3 AR/NR 6.8 20.3 16.2 2.0 1.8 Inventory 0.0 0.0 0.0 0.0 0.0 Total current asset 300.8 808.3 665.3 536.4 478.3 Net fixed asset 6.1 5.4 4.3 4.8 4.0 Total asset 617.2 1,058.0 854.4 659.4 828.6
Short-term borrowings 0.0 0.0 0.0 0.0 0.0 AP/NP 18.8 16.6 14.8 13.6 0.0 Total current liabilities 19.1 16.9 15.1 14.2 14.2 Long-term debt 0.0 0.0 0.0 0.0 0.0 Total liabilities 19.1 16.9 15.1 14.2 14.2 Shareholder's Equity 598.1 1,041.1 839.2 645.2 814.5
Source: Company
0
2
4
6
8
10
12
14
16
18
2012 2013E 2014E 2015E 2016E 2017E
(USDbn)
US Italy France Germany Spain UK
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Taiwan Healthcare Sector 2 September 2013
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Taiwan Liposome Company (4152 TT, TWD344, Not rated)
Market cap: USD622m
Highlight
• Taiwan Liposome Company (TLC) focuses on the formulation design for liposomal drugs, which is similar to what an IC-design house does in the semiconductor supply chain.
Overview
Founded in 1997, TLC is a specialty pharmaceutical company with a proprietary drug-delivery technology based on a lipid formulation platform, lipid-based drug delivery system, specifically for injectibles. The management team, with almost a decade of combined experience in R&D, is led by the founder, CEO and chairman, Keelung Hong, who has more than 30 years of R&D experience in liposomes and has published more than 100 publications and papers, including in the Journal of the American Chemical Society. TLC: major shareholders Name % holding Burrill Life Sciences Capital Fund Iii, L.P. 13.37Shang Chih Venture Capital 8.37Marvelex Ltd 8.22Shang Chih Life Science Ve 7.44Mega Intl Commercial Bank Co Ltd 6.81TTY Biopharm 3.6Powerchip Technology Corp 2.95Boston Life Science Ven Co 2.72Chi Hang Venture Capital 2.06Total 55.5
Source: Bloomberg, TEJ
Note: as of 31 July 2013
Business focus
• The company focuses on the formulation of small molecules and specialises in drug delivery.
• It is also engaged in developing super generics (defined as drugs that have gone off patent but have no generic version available due to high entry barriers), new formulations, and NCEs for orphan drugs to minimise the development timeframe.
• Aims to out-license its products. Its earnings could come from upfront payments and royalties .
Pipeline
• Doxisome for ovarian- and breast-cancer treatment is a key product to watch, because of high potential for delay. The company says approval from Europe might come before that in the US (where it expects it to come in 2015).
• The drug Ambil received permission in Taiwan to be commercialised in July this year. The company has partnered with Taiwan’s Yungshin Pharm, for marketing and manufacturing. A partner in Europe might be finalised soon, according to TLC.
• The company expects the revenue contribution from ProFlow, a treatment for peripheral arterial disease, to start from 2013 in Taiwan, followed by contributions from Japan and then China (where it has partnered with NASDAQ-listed SciClone Pharmaceuticals). The company believes the potential size of the China market is about USD280m annually.
• The company plans to out-license ProDex, a drug to treat macular edema, and TLC388 following phase II trials.
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Taiwan Healthcare Sector 2 September 2013
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TLC: drug-development pipeline & status
Target disease Status Partners Potential market
size Super generics Doxisome (Liposomal Doxorubicin HCl)
Ovarian cancer, breast cancer ANDA submission Teva (US) USD500m (J&J)
Ambil (Liposomal Amphotericin B)
Systemic fungal infection ANDA submission
YSP (Taiwan), in the process of out-licensing discussion for western countries
USD347m (Gilead)
New formulations
LipoDox Ovarian cancer, breast cancer On market TTY (worldwide)
ProFlow PAD, diabetic neuropathy & ulcers
Approved (except for China, where it is in the process of obtaining approval)
NGC (Japan); Ildong (Korea); Fundachieve (Taiwan); ScoClone (China)
ProDex
Age-related macular degeneration (AMD)
IND submission Expects clinical trial I/II by 2014
TLC 178 Non-Hodgkin lymphoma
Preclinical - expect phase II by 2016
Expects to out-license one of the three new products by the end of 2013 and clinical trials to start in 2013
Expects to achieve USD8.4bn in revenue for 2019, up from USD4bn for 2009***
TLC 198 Local anaesthetics
Preclinical - expect to apply FDA approval in 2016
Expects to achieve USD3.4bn for 2019 from USD1.8bn for 2010**
TLC 599 Arthritis Preclinical - expect to apply FDA approval in 2016
Expects sales to increase at a CAGR of 7.2%, from USD20.6bn in 2010 to USD38bn in 2018*
NCE
Lipotecan RCC, HCC Phase II (Taiwan)
Expects to start clinical trials in 2H13 in China
Source: Company
Note: *According to GBI Research; ** according to Avos Life Sciences; *** according to Pharma Times Online
Cash flow
• As at the end of 2Q13, TLC had TWD722m in cash on hand.
• The company expects 2013 R&D expenses to amount to about TWD250m.
• It raised TWD2.98bn in funds this year. TLC: fundraising schedule Time Type of securities Price/share (TWD) Deal size (TWDm) Jul-09 Common stock 42.45 343.5 Apr-11 Common stock 42.45 200.0 Sep-11 Common stock 68.00 300.0 2012 Common stock (IPO) 157.35 727.3 July-13 Common stock 298.00 2,980.0
Source: Company
• TLC expects additional investment in its existing
pipeline as shown in the following table between 2013 and 2016.
• The stock is trading currently at a PBR of 15.8x on its 2012 BVPS.
TLC: planned R&D investment for three new drug-development projects (TWDm) 2013E 2014E 2015E 2016ETLC599 22.2 100.2 88.8 148.8 TLC198 36.0 126.0 339.0 129.0 TLC178 9.3 89.7 297.0 594.0 Total 1,980.0
Source: Company; note: represents company guidance
Financial statements
TLC: income statement (TWDm) 2008 2009 2010 2011 2012 1H13 Revenue 22 26 37 78 241 126Gross Profit 22 26 37 78 241 126Operating Profit (212) (187) (218) (225) (190) (44)Non-Op Profit 1 3 28 9 3 (2)Pretax Profit (210) (184) (190) (217) (187) (43)Net Income (210) (184) (190) (217) (187) (43)EPS (TWD) (10) (8.92) (9.00) (5.55) (4.25) (0.98)
Margin (%) Operating Profit Margin n.a. n.m. n.m. n.m. n.m. n.m.Net Income Margin n.a. n.m. n.m. n.m. n.m. n.m.
YoY(%) Revenue n.a. 16.6 41.2 113.5 207.6 n.a.Operating Profit n.a. n.m. n.m. n.m. n.m. n.a.Pretax Profit n.a. 172.3 783.7 -69.7 -66.0 n.a.Net Income n.a. n.m. n.m. n.m. n.m. n.a.EPS n.a. n.m. n.m. n.m. n.m. n.a.
Source: Company
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Taiwan Healthcare Sector 2 September 2013
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TLC: balance sheet (TWDm) 2008 2009 2010 2011 2012 1H13 Cash 27.7 182.2 38.3 309.0 908.1 722.3 AR/NR 8.9 23.7 11.1 14.2 35.9 55.8 Inventory 0.0 0.0 0.0 0.0 0.0 0.0 Total current asset 68.8 250.6 81.5 363.7 951.5 788.0 Net fixed asset 32.9 89.2 90.8 93.9 128.6 111.2 Total asset 184.4 404.3 230.9 505.8 1,123.7 988.9 Short-term borrowings 0.0 0.0 0.0 0.0 0.0 0.0 AP/NP 40.2 27.7 41.7 33.0 124.0 0.0 Total current liabilities 57.5 49.5 65.8 60.1 149.4 63.8 Long-term debt 58.6 124.0 111.6 89.9 69.9 60.1 Total liabilities 116.7 174.2 182.6 154.9 223.5 134.3 Shareholder's Equity 67.6 230.1 48.3 350.9 900.3 890.8
Source: Company
TLC: Cash flow (TWDm) 2008 2009 2010 2011 2012 1H13
CFO (32.3) (153.2) (129.7) (235.1) (63.7) (153.5)CFI (1.9) (97.0) (8.7) 1.0 (54.4) (23.0)CFF 0.7 405.8 (3.7) 504.1 717.8 (9.7)- share issuance 0.0 343.5 0.0 500.0 729.4 0.0 - debt issuance 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company
TLC: revenue by customer (2012)
Source: Company
Glossary Term Definition API Active pharmaceutical ingredients.
Asthma Asthma is a common chronic inflammatory disease of the airways characterised by variable and recurring symptoms, reversible airflow obstruction, and bronchospasm. Common symptoms include wheezing, coughing, chest tightness, and shortness of breath.
Autoimmune Autoimmunity is the failure of an organism in recognising its own constituent parts, thus leading to an immune response against its own cells and tissues.
Biosimilar Also known as follow-on biologics, these are biologic medical products whose active drug substance is made by a living organism or derived from a living organism by means of recombinant DNA or controlled gene expression methods
Cardiovascular disease Cardiovascular disease (also called heart disease) is a class of diseases that involves the heart, the blood vessels (arteries, capillaries, and veins) or both. Chemosensitiser A drug that makes tumour cells more sensitive to the effects of chemotherapy.
CMO A Contract Manufacturing Organisation, sometimes called a Contract Development and Manufacturing Organisation (CDMO), serves the pharmaceutical industry and provides clients with comprehensive services from drug development through manufacture.
CRO A contract research organisation (CRO) is an organisation that provides support to the pharmaceutical, biotechnology, and medical device industries in the form of research services outsourced on a contract basis.
Diabetes A group of metabolic diseases in which a person has high blood sugar, either because the pancreas does not produce enough insulin, or because cells do not respond to the insulin that is produced.
Gastrointestinal The human gastrointestinal tract is the stomach and intestine, sometimes including all the structures from the mouth to the anus. Generics Drugs sold in a package without a brand. Glycosphingolipid Glycosphingolipids are a subtype of glycolipids containing the amino alcohol sphingosine. IMS International Medical Services, a department of the State University Medical Center Freiburg offering services for foreign patients. Infliximab Infliximab (INN; trade name Remicade) is a monoclonal antibody against tumour necrosis factor alpha (TNF-α) used to treat autoimmune diseases.
Lipid regulators Lipid regulators, mainly statin drugs, are used to prevent dyslipidemia (high blood cholesterol) and other cardiovascular problems, and have been prescribed for the prevention and treatment of many other illnesses including osteoporosis and post-menopause complications.
MAb products Monoclonal antibodies (mAb or moAb)
Milestone payment
An Authority payment made to a Contractor which is linked to the Contractor delivering a service or commodity such that, should the Agreement be terminated at the point of payment, the Authority will have received working assets that would have some "intrinsic value" (at least equal to or greater than the total of the aggregate Milestone Payments up to that point).
Monoclonal antibodies
Monoclonal antibodies (mAb or moAb) are monospecific antibodies that are the same because they are made by identical immune cells that are all clones of a unique parent cell, in contrast to polyclonal antibodies which are made from several different immune cells. Monoclonal antibodies have monovalent affinity, in that they bind to the same epitope.
NCE A new chemical entity (NCE) is, according to the US Food and Drug Administration, a drug that contains no active moiety that has been approved by the FDA in any other application submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act.
NCE New chemical entity, an investigational drug NDA Acronym for new drug application Novel drugs Another term for new drugs.
Orphan drug An orphan drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition, the condition itself being referred to as an orphan disease.
Patent cliff The phenomena of patent expiration dates and an abrupt drop in sales that follows for a group of products capturing a high percentage of a market. Pharmerging Refer to the sector developing new drugs in the article.
Phase I Clinical trials involving new drugs are commonly classified into four phases.In Phase I trials, researchers test an experimental drug or treatment in a small group of people (20-80) for the first time to evaluate its safety, determine a safe dosage range, and identify side effects.
Phase II In Phase II trials, the experimental treatment is given to a larger group of people (100-300) to see if it is effective and to further evaluate its safety
Phase III In Phase III trials, the treatment is given to large groups of people (1,000-3,000) to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that will allow it to be used safely
Pompe disease Glycogen storage disease type II (also called Pompe disease or acid maltase deficiency) is an autosomal recessive metabolic disorder which damages muscle and nerve cells throughout the body.
Respiratory disorders Respiratory disorders is a term that encompasses pathological conditions affecting the organs and tissues that make gas exchange possible in higher organisms, and includes conditions of the upper respiratory tract, trachea, bronchi, bronchioles, alveoli, pleura and pleural cavity, and the nerves and muscles of breathing.
Source: Daiwa
Twi Pharmaceuticals
(Doxisome) 64.9%
TTY Biopharm (LipoDox)
13.9%
TEVA Pharmaceutical
(ProFlow) 21.2%
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See important disclosures, including any required research certifications, beginning on page 53
■ Investment case We initiate coverage of TTY Biopharm with a Buy (1) rating. The company is transforming itself from a domestic player engaged in the manufacture and sale of generic drugs into a marketing-oriented international firm focused on developing new drugs. We expect earnings growth to accelerate from 2013, and forecast the ROE to expand over 2013-15 to 21-27% (2012: 17%) on the back of the rights to commercialise new products, and manufacturing contracts with global top-tier customers. ■ Catalysts Strong contract-manufacturing business. We expect TTY Biopharm’s standalone contract manufacturing organisation (CMO) business to increase sharply in 2H13 on the back of the contract manufacturing of doxorubicin, a drug used in chemotherapy, for Johnson & Johnson (J&J). We expect the revenue contribution to
TTY Biopharm from this business to start from end-3Q13/early 4Q13, and forecast sales from this to make up 20% of 2013 consolidated sales. Royalties from PharmaEngine. This should be another important earnings driver for TTY Biopharm in coming years. We forecast 22%-owned subsidiary PharmaEngine to account for more than 40% of TTY Biopharm’s operating income over 2014-15. Biosimilars provide long-term earnings upside. The company’s shift to biosimilar contract manufacturing and the development of new protein drugs should provide long-term upside to earnings. ■ Valuation We have a six-month DCF-based target price of TWD120. This translates into a 2014E PER of 20x (near the midpoint of the stock’s trading range of 15-30x over the past five years). The stock is trading at a discount to its China and India peers in terms of both PER and PBR valuations. We do not see the valuation as being stretched and believe the stock deserves to be rerated on the back of shipment growth from the contract manufacturing of doxorubicin for a major global pharma company.
■ Risks Risks to our view are: 1) revenue from contract manufacturing for J&J being lower than expected, 2) a lower contribution from PharmaEngine due to a delay in Merrimack’s progress in applying for approval of a drug for pancreatic cancer, and 3) higher-than-expected operating expenses from China subsidiaries.
Health Care / Taiwan4105 TT
2 September 2013
TTY Biopharm
Initiation: a healthcare company undergoing a transformation
• Contract-manufacturing business should expand with the recent addition of a global top-tier customer
• Milestone fees from Merrimack for a pancreatic cancer drug likely to be another earnings driver
• We expect earnings growth to accelerate from this year; coverage initiated with a Buy (1) rating
Source: FactSet, Daiwa forecasts
Health Care / Taiwan
TTY Biopharm4105 TT
Target (TWD): 120.00Upside: 20.4%30 Aug price (TWD): 99.70
Buy (initiation)
OutperformHoldUnderperformSell
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103
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Share price performance
TTY Biopha (LHS)Relative to TWOTCI (RHS)
(TWD) (%)
Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 4,593 7,193 7,594Operating profit (m) 660 1,836 1,837Net profit (m) 868 1,375 1,391Core EPS (fully-diluted) 3.724 5.900 5.970EPS change (%) 46.9 58.4 1.2Daiwa vs Cons. EPS (%) (11.4) 3.5 n.a.PER (x) 26.8 16.9 16.7Dividend yield (%) 0.6 0.9 1.5DPS 0.6 0.9 1.5PBR (x) 5.2 3.9 3.2EV/EBITDA (x) 29.2 11.5 10.8ROE (%) 21.8 26.6 21.2
Christine Wang(886) 2 8758 [email protected]
12-month range 83.28-109.73Market cap (USDbn) 0.783m avg daily turnover (USDm) 4.11Shares outstanding (m) 233Major shareholder Tawan Technology (8.5%)
How do we justify our view?How do we justify our view?
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Growth outlook TTY Biopharm: earnings projections
On the back of strong shipments of doxorubicin to a global pharmaceutical company, and royalty income from TTY Biopharm’s subsidiary, PharmaEngine, we forecast net profit to see double-digit-percentage growth over 2013-14, up from a rise of only 4% YoY for 2012.
Source: Company, Daiwa forecasts
Valuation TTY Biopharm: one-year forward PER
Our six-month target price of TWD120 is based on a DCF valuation (please refer to the table on p.35 for a breakdown). This translates into a 2014E PER of 20x (close to the midpoint of the stock’s trading range of 15-30x over the past five years). The stock is trading at a discount to its China and India peers in terms of both PER and PBR multiples. We do not see the valuation as being stretched and believe the stock deserves to be rerated on the back of shipment growth as a result of contract manufacturing for J&J.
Source: TEJ, Daiwa forecasts
Earnings revisions TTY Biopharm: consensus earnings-forecast revisions
The Bloomberg-consensus 2013 and 2014 earnings started to be raised from June, attributed we believe to the announcement of the J&J manufacturing contract. The consensus is especially positive on earnings for 2014.
Source: Bloomberg
How do we justify our view?
Growth outlook
Valuation
Earnings revisions
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Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ETTY parent sales YoY % n.a. 13 (20) 17 4 6 20 28PharmaEngine sales YoY % n.a. n.a. n.a. n.a. (43) (18) 1,300 (29)TSH parent sales YoY% n.a. (3) 7 5 (9) 3 5 8
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ETotal Taiwan sales n.a. 2,205 2,349 2,603 2,621 3,060 5,507 5,740China sales n.a. 963 1,087 1,266 1,389 1,528 1,681 1,849Other Revenue n.a. 0 1 2 5 5 5 5Total Revenue 2,920 3,168 3,438 3,871 4,016 4,593 7,193 7,594Other income 0 0 0 0 0 0 0 0COGS (1,116) (1,227) (1,217) (1,464) (1,499) (2,032) (3,080) (3,368)SG&A 0 0 0 0 0 0 0 0Other op.expenses 0 0 0 0 0 0 0 0Operating profit 455 440 543 547 653 660 1,836 1,837Net-interest inc./(exp.) 6 1 1 (6) (6) (3) (4) (5)Assoc/forex/extraord./others (34) 10 22 284 228 584 81 95Pre-tax profit 427 451 566 825 875 1,241 1,914 1,928Tax (65) (83) (126) (169) (193) (258) (409) (408)Min. int./pref. div./others (80) (53) (75) (134) (140) (116) (130) (129)Net profit (reported) 282 315 365 522 542 868 1,375 1,391Net profit (adjusted) 282 315 365 522 542 868 1,375 1,391EPS (reported)(TWD) 2.573 2.457 2.610 3.025 2.534 3.724 5.900 5.970EPS (adjusted)(TWD) 2.573 2.457 2.610 3.025 2.534 3.724 5.900 5.970EPS (adjusted fully-diluted)(TWD) 2.573 2.457 2.610 3.025 2.534 3.724 5.900 5.970DPS (TWD) 1.600 1.843 2.331 0.482 0.767 0.642 0.943 1.495EBIT 455 440 543 547 653 660 1,836 1,837EBITDA 563 546 639 656 776 811 2,015 2,027
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 427 451 566 825 875 1,241 1,914 1,928Depreciation and amortisation 108 105 96 109 124 151 179 190Tax paid (65) (83) (126) (169) (193) (258) (409) (408)Change in working capital (108) (68) (236) (157) (45) (114) (717) (98)Other operational CF items 24 96 73 14 (296) 94 70 80Cash flow from operations 386 501 373 622 464 1,114 1,036 1,692Capex (131) (174) (473) (843) (311) (643) (288) (304)Net (acquisitions)/disposals 0 (15) (172) (410) 37 0 0 0Other investing CF items 29 (19) 29 (2) (5) (0) 5 (1)Cash flow from investing (103) (209) (616) (1,255) (278) (643) (283) (305)Change in debt 135 (47) 843 652 (110) 0 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (149) (202) (299) (67) (132) (137) (220) (348)Other financing CF items (184) (12) 182 136 329 158 201 206Cash flow from financing (198) (262) 726 721 86 21 (19) (142)Forex effect/others 19 (12) (15) 34 (15) (2) 0 4Change in cash 104 19 468 122 258 490 735 1,249Free cash flow 254 327 (99) (220) 153 471 749 1,389
Financial summary
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Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Company profile
Founded in 1960, TTY Biopharm started as a pharmaceutical company focusing on the production and sales of generic drugs. Throughout the years, it has gradually focused on “high-entry barrier” generic drugs, specifically by leveraging its liposome-based delivery technology. Particularly, it specialized on cancer drugs, operating Good Manufacturing Practice certified anti-cancer drug plants both in Taiwan and China.
As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 575 596 1,013 1,135 1,579 1,953 2,558 3,679Inventory 429 477 541 592 596 814 1,215 1,338Accounts receivable 865 885 1,079 1,211 1,247 1,359 2,152 2,281Other current assets 68 120 74 110 109 109 109 109Total current assets 1,937 2,078 2,707 3,049 3,532 4,236 6,035 7,407Fixed assets 830 900 1,278 1,937 2,092 2,583 2,692 2,806Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 339 345 474 1,099 1,375 1,353 1,353 1,353Total assets 3,106 3,323 4,460 6,084 6,998 8,172 10,080 11,566Short-term debt 157 110 953 1,605 1,495 1,495 1,495 1,495Accounts payable 451 544 562 716 710 926 1,404 1,557Other current liabilities 107 144 134 161 146 146 146 146Total current liabilities 714 798 1,649 2,482 2,351 2,567 3,045 3,198Long-term debt 0 0 0 0 0 0 0 0Other non-current liabilities 162 159 162 192 211 211 211 211Total liabilities 876 957 1,811 2,674 2,562 2,778 3,256 3,410Share capital 1,097 1,283 1,398 1,726 2,140 2,330 2,330 2,330Reserves/R.E./others 806 737 765 994 1,363 2,131 3,562 4,893Shareholders' equity 1,903 2,020 2,163 2,720 3,503 4,461 5,892 7,223Minority interests 327 346 485 691 933 933 933 933Total equity & liabilities 3,106 3,323 4,460 6,084 6,998 8,172 10,081 11,566EV 23,139 23,090 23,654 24,390 24,078 23,704 23,099 21,978Net debt/(cash) (418) (486) (60) 470 (84) (458) (1,063) (2,184)BVPS (TWD) 17.352 15.741 15.470 15.762 16.369 19.145 25.287 31.003
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 3.9 8.5 8.5 12.6 3.8 14.4 56.6 5.6EBITDA (YoY) 17.0 (3.1) 17.1 2.7 18.3 4.5 148.4 0.6Operating profit (YoY) 21.1 (3.3) 23.4 0.7 19.3 1.1 178.3 0.0Net profit (YoY) 15.4 11.8 15.8 43.1 3.9 60.0 58.4 1.2Core EPS (fully-diluted) (YoY) (2.2) (4.5) 6.2 15.9 (16.2) 46.9 58.4 1.2Gross-profit margin 61.8 61.3 64.6 62.2 62.7 55.8 57.2 55.6EBITDA margin 19.3 17.2 18.6 17.0 19.3 17.7 28.0 26.7Operating-profit margin 15.6 13.9 15.8 14.1 16.3 14.4 25.5 24.2Net profit margin 9.7 10.0 10.6 13.5 13.5 18.9 19.1 18.3ROAE 15.4 16.1 17.4 21.4 17.4 21.8 26.6 21.2ROAA 9.5 9.8 9.4 9.9 8.3 11.4 15.1 12.9ROCE 19.7 18.1 17.9 12.7 11.9 10.3 24.2 20.4ROIC 22.4 19.5 18.9 13.5 12.4 11.3 27.0 24.7Net debt to equity net cash net cash net cash 17.3 net cash net cash net cash net cashEffective tax rate 15.2 18.3 22.2 20.5 22.1 20.8 21.4 21.2Accounts receivable (days) 109.0 100.8 104.3 108.0 111.7 103.5 89.1 106.5Current ratio (x) 2.7 2.6 1.6 1.2 1.5 1.7 2.0 2.3Net interest cover (x) n.a. n.a. n.a. 90.5 109.0 244.8 517.6 402.0Net dividend payout 62.2 75.0 94.9 18.5 25.3 25.3 25.3 25.3Free cash flow yield 1.1 1.4 n.a. n.a. 0.7 2.0 3.2 6.0
Financial summary continued …
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Taiwan Healthcare Sector 2 September 2013
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A healthcare company undergoing a transformation
TTY Biopharm’s ability to identify future healthcare trends and operational execution in the healthcare industry should lead to a period of multi-year earnings growth.
Key investment theme
Company background Founded in 1960, TTY Biopharm started as a pharmaceutical company focusing on the production and sales of generic drugs. Over the past 17 years it has been transforming itself into a pharmaceutical conglomerate, with a focus on various parts of the value chain, ranging from developing branded generics to innovative drugs. The company is also expanding into new-drug development and biosimilar drugs. Key investment theme We initiate coverage of TTY Biopharm with a Buy (1) rating based largely on the key revenue-growth drivers we expect.
• We believe the standalone business will increase sharply on the back of its contract manufacturing of doxorubicin for J&J. We expect the revenue contribution to TTY Biopharm from this business to start from the end of 3Q13/early 4Q13. We forecast sales from this product line to account for 20% of the company’s overall consolidated sales for 2013.
• PharmaEngine’s PEP02 nanoliposomal irinotecan, a cancer drug, should be another important driver of TTY Biopharm’s earnings from 2014. We forecast PharmaEngine to account for 29% of TTY Biopharm’s consolidated sales for 2014.
TTY Biopharm: consolidated revenue breakdown (2013E)
Source: Daiwa estimates
Note: TSH is a 12.6%-owned subsidiary
• Another reason we like TTY Biopharm is its ability to
identify future healthcare trends and its strong operational execution. The company has built up new drug pipelines (both small molecular and biologics), as well as biosimilar and generic contract-manufacturing capabilities in both China and Taiwan, and distribution channels in Greater China and Southeast Asia.
Driver 1: contract manufacturing business should start delivering strong growth from 2H13
Doxorubicin for ovarian cancer likely to account for 17-20% of consolidated sales over 2013-15E The contract manufacturing of doxorubicin for J&J should be an important earnings driver for TTY Biopharm from this year. We forecast the contribution to the company’s consolidated sales to be 17-20% over 2013-15. Doxil/Caelyx is a liposomal formulation of doxorubicin and is branded by J&J. This is indicated for the treatment of patients with ovarian cancer, multiple myeloma, and AIDS-related Kaposi’s sarcoma. A generic version from Sun Pharma (of India) was approved by the US FDA in 1Q13 to alleviate the shortage of this critical cancer drug. The annual global market for doxorubicin is valued at USD400-500m, according to IMS Health, a provider of information on the healthcare industry.
TTY Biopharm40.7%
PharmaEngine15.3%
TSH12.6%
China group31.2%
Other divisions0.1%
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Capacity ready for production ramp-up
• TTY Biopharm has been developing liposomal drugs since 1995 and was the third company in the world to have the capability to manufacture liposomal drugs.
• Its Lipo-DOX compound, launched in Taiwan in 1998, is a liposomal doxorubicin that is similar to the doxorubicin. TTY Biopharm is the contract manufacturer of the compound for a Dutch company, BBB Pharmaceutical.
• The company has been preparing capacity for BBB Pharmaceutical since 2012, and since 2011 has been expanding its annual capacity for injectable cancer drugs at Chung-Li, in Taiwan, which it expects to rise from 420,000 vials/year in 2011, to 1m/vials by the end of 2013. As this is TTY Biopharm’s only major CMO project for injectable cancer drugs this year, we are confident that the company will be able to ramp up production volume for this drug.
Driver 2: PharmaEngine’s milestone income
PEP02 should be the key near-term earnings driver PharmaEngine (in which TTY Biopharm has a 22% stake) should be another key earnings driver. We forecast it to account for more than 50% of TTY Biopharm’s consolidated operating profit for 2014, up from less than 10% over 2012-13. We expect cancer drug PEP02 to be the main contributor. PharmaEngine licensed the rights to sell PEP02 (liposomal irinotecan) in Europe and Asia to US company Merrimack in May 2011. The drug is currently undergoing phase III clinical trials for second-line pancreatic-cancer treatment and Merrimack hopes the top-line results will be announced by 1H14. Merrimack pays PharmaEngine a total of USD220m (compared with what the company says is a potential market size for PEP02 ofUSD1.2-1.6bn), with an upfront fee of USD10m and milestone payments totalling USD210m. Based on Merrimack’s current schedule, we expect PEP02 to be the key earnings driver for PharmaEngine over the next two years.
For PharmaEngine, we make the following assumptions.
• We forecast a 2012-15 revenue CAGR of 88%, the biggest among key divisions of TTY Biopharm (accounting for 24% of total revenue over the period).
• In addition, we forecast its operating-profit margin to be more than 40% from 2014, compared with 15% for TTY Biopharm for 2010-12. As such, we expect PharmaEngine to help drive TTY Biopharm’s overall operating margin from 14% for 2011, to about 25% over 2014-15.
PharmaEngine: % of TTY’s consolidated sales
Source: Company, Daiwa forecasts
PharmaEngine: revenue contributor to TTY Biopharm and comparison with other divisions
2012-15 revenue CAGRTTY Biopharm (standalone basis) 25%PharmaEngine 88%TSH (56%-owned subsidiary) 5%China 10%TTY Biopharm total 24%
Source: Daiwa forecasts
PharmaEngine’s pipeline Other than PEP02’s application for second-line pancreatic cancer treatment, PharmaEngine has drugs that are currently undergoing phase II clinical trials for the treatment of colorectal cancer and phase I trials for the treatment of brain cancer. Given that its pipelines of other drugs are either undergoing phase I clinical trials or at the preclinical stage, we believe PEP02 will be the main revenue driver for PharmaEngine for the foreseeable future.
0%
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PharmaEngine: pipeline and current status Target disease Status Partners Terms/notes
PEP02 (MM-398) Pancreatic cancer
Phase III (expected to be launched in 4Q14)
Out-licensed to Merrimack for Europe and Asia (except Taiwan)
PharmaEngine: 1) received an upfront payment of USD10m, 2) is eligible to receive a total of USD210m in milestone payments, and 3) receives tiered royalties on net sales in Asia and Europe
Colorectal cancer
Phase II (expected to be launched in 3Q16)
Brain cancer Phase I
PEP503 (NBTXR3)
Soft tissue sarcoma (with other indications in the planning process)
Phase I
In-licensed from Nanobiotix for sale in the Asia-Pacific region
Nanobiotix receives an upfront payment of USD1m and is eligible for milestone payments amounting to USD56m
PEP06 Cancer Research
In-licensed from China's BeBetter Medicine for sale worldwide (excluding China)
n.a.
Source: Company
Other key drugs in the pipeline over the near term
Over the past 17 years, TTY Biopharm has transformed itself from a Greater China-focused pharmaceuticals company into a global player, and is seeking to expand its manufacturing expertise to other CMO opportunities in the future. In addition, TTY Biopharm not only plans to focus on generic and liposomal drugs, but is also eyeing biosimilar manufacturing opportunities in the future (monoclonal antibody drugs – RTIA07 and BCIA07). The company’s key focus areas include:
• Liposome technology.
• Sustained release technology.
• New indication development of anti-cancer drugs.
• Specialisation in producing anti-cancer drugs. TTY Biopharm has built a dedicated plant for anti-cancer drugs in Chung-Li in Taiwan.
TTY Biopharm: key product pipeline Products Indications Schedule for launch Liposomal drug LAIA98 Fungus infection Jun-12 LDIA09 Ovarian cancer; AIDS-related Kaposi's
Sarcoma; Multiple myeloma Dec-12
LLIA09 Breast cancer Dec-2013 (IND submission) LPIA04 Treatment of advanced prostate
cancer; Endometriosis Apr-14
Generic drug CSIA05 Pseudomonas Dec-12 IXIA10 Haemophilia Dec-17 Monoclonal antibody drug RTIA07 Non-Hodgkin's Lymphoma Dec-16 BCIA07 Colorectal cancer Dec-18
Source: Company data
Lipo-AB We estimate this drug will be a key earnings driver for TTY Biopharm from 2015, with Lipo amphotericin B (Lipo-AB) sales accounting for 5% of TTY Biopharm’s 2015E consolidated sales. Management guides for this drug to be launched by the end of 2014 and to contribute around TWD400m in sales for 2015. The company has not yet disclosed its marketing partner for this drug. Amphotericin B, the branded drug which originated from Gilead Sciences of the US, is used for potentially life-threatening fungal infections. The European patent has expired, and the US patent is due to expire in 2016. Both TTY Biopharm and Taiwan Liposome Company, a partner in R&D, have obtained permits in Taiwan and are both seeking international partners currently. The global market size for amphotericin B is USD900m, according to TTY Biopharm. Leuprolide SR We expect leuprolide SR to contribute to TTY Biopharm’s earnings from 2015-16, and account for 3.5% of its total consolidated sales in 2015. The global generic market size for leuprolide/lupron is around USD1.8bn, according to TTY Biopharm, and the company expects it to account for 35% of the global market after the third year of shipments. Key indications include prostate cancer, the management of endometriosis, uterine fibroids, and central precocious puberty.
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Important to monitor the long-term goals
TTY Biopharm has transformed itself from a pure generics company into a generic brand pharmaceuticals company over the past 17 years, and is now focused on specialty pharmaceuticals, while moving towards becoming a global player in the niche pharmaceuticals area. With the company constantly transforming itself to catch future healthcare trends, we believe it is worth paying attention to its long-term goals. TTY Biopharm: business model and development process
Source: Company
Strategy 1: a focus on high entry barrier generic drugs According to IMS Health, global spending on generic drugs is forecast to post a strong CAGR of 10%+ for 2011-16, compared with less than a 1% CAGR for branded drugs over the same period. The higher growth will be largely driven by a higher penetration of generic drugs over branded drugs globally. Global spending on generics
Source: IMS Health
Across generic drugs, TTY Biopharm focuses on compounds with high entry barriers, which face less competition from Indian and Chinese peers, in order to maintain high margins.
No. of competitors vs. price cuts for generic drugs
Source: IMS Health
Going forward, TTY Biopharm plans to focus on several key areas where it believes there is a high likelihood of drug shortages.
• Oncology: TTY Biopharm.
• Cardiovascular and gastrointestinal treatments: 54% owned subsidiary TSH Pharma.
• Central nervous system (CNS) treatments: co-development partner Center Lab.
We believe these three indications, together with anti-infection drugs, account for about 50% of the current shortage of drugs, and so drugs developed in these areas could mean they have higher operating-profit margins than other drugs. In addition to the key indications the company plans to focus on, its core competitiveness in liposomal drug manufacturing, which requires high stability and sterile conditions for the injectables, together with its design on new formulations and familiarity with related regulations, should also support its strong pipeline of key focused indications going forward. Strategy 2: rising exposure to biosimilar drugs on the biologics’ patent cliff IMS Health estimates that global biologic drugs will face the patent cliff from this year, with more than 90% of the patents due to expire by 2020. This means that a market size of around USD86bn will be available for biosimilar drugs, and is the reason TTY Biopharm plans to expand its contract manufacturing business from generic to biosimilar drugs.
New entityTTY: Asia/China/TWGlobal: cooperation
Special formulationCore competence: CMC, technology platform, regulation, CT, manufacturing, patent Market: big area
New formulationCore competence:
regulation, CT, CMC, patent
Market: big area
Generic Core competence: Manufacturing, salesMarket: local
Biosimilar Special formulation
Targeted/biodrug
Risk
Profit
596
242
118
615 - 645
400 - 430
130 - 160
0
100
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300
400
500
600
700
Brands Generics Other
(USDbn)
2011 2016
94%
52%44%
39%33%
26%23%21%20%26%22%20%24%
15%13%11% 9% 8% 6%
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40%
60%
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100%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19Number of generic manufacturers
Avg. relative price per dose(avg./brand)
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Biosimilar market size
Source: IMS Health
In addition, the entry barriers to manufacturing biosimilar drugs are higher than for generic drugs due to the need to control batch-to-batch consistency on the complex molecular structure and prevent contamination. As such, less competition is likely compared with generics. TTY Biopharm is co-operating with Mycenax Biotech in Taiwan and TOT Biopharm in China on biosimilar development currently. The long-term goal is to develop biologics to create greater value for TTY Biopharm.
• Biologics: the long-term target. TTY Biopharm is currently developing a number of biosimilar drugs (which over the long term it plans to develop into biologics). Its TuNEX (a biosimilar for Roche/Amgen’s Enbrel) is currently in phase III clinical trials with TSH Biopharma in Taiwan. The company targets to get the permit in Taiwan first and then expand to emerging markets later. Over the long term, the company still aims to focus on biologics. The main reasons are that the development of biosimilars usually takes 5-6 years and requires USD65-100m in order to prove that the biosimilar is similar to branded biologics in terms of molecular structure. Moreover, obtaining the results from animal studies and clinical trials take time (generic drugs do not need to go through clinical trials). Hence, many global biotech companies aim to develop biologics rather than biosimilars.
We highlight TTY Biopharm’s business on biosimilars.
• Eyes on licensing/royalty fees. Among the global top-10 blockbuster drugs, more than half are biologics. TTY Biopharm is focusing on developing biosimilars to Rituxan, Avastin, Herceptin and Erbitux, and targeting to license out those biosimilar drugs after 2016-17.
Potential top-5 biologics for 2014
Rank Drug Company Therapeutic area Revenue USDbn
Patent expiration
1 Avastin Roche Oncology 9.232 20192 Humira Abbott & Eisai Antirheumatic 9.134 20163 Rituxan Roche Antirheumatic 7.815 2015
4 Enbrel Wyeth, Amgen & Takeda
Antirheumatic 6.583 2012
5 Lantus Sanofi-Aventis Diabetes 6.386 2015
Source: Nature Biotechnology
Note: TTY Biopharm is developing the drugs shaded in grey
• Contract manufacturing likely to generate
cash flow. Mycenax Biotech’s core technology is scale-up platform technology for biologics/ biosimilar manufacturing. Unlike Samsung Electronics and LG Electronics, Mycenax uses disposable bioreactors that shorten the downtime when switching to different processes, and largely reduce the contamination risk. Its business model is that of a contract development and manufacturing organisation (CDMO).
Valuation and target price
We initiate coverage of TTY Biopharm with a Buy (1) rating and six-month target price of TWD120 for the following reasons.
• We expect near-term earnings to be driven by the contract manufacturing of the cancer drug doxorubicin for J&J. The earnings contribution for TTY Biopharm should start from the end of 3Q13.
• Subsidiary PharmaEngine’s royalty income from Merrimack should start to contribute significantly to TTY Biopharm’s consolidated earnings from 2014.
Our six-month target price of TWD120 is based on a DCF valuation, and translates into a PER of 20x (close to the mid-point of the stock’s past-five-year trading range of 15-30x) based on our 2014 EPS forecast. Our peer valuation comparison shows that TTY Biopharm is trading at a discount to its China and India peers in terms of 2014E PER. We forecast earnings growth of 58% YoY for 2014 for TTY Biopharm, above the Bloomberg-consensus 2014 earnings growth forecasts for the China and India peers. In our view, TTY Biopharm’s valuation is not stretched and we think the stock would deserve a rerating if PharmaEngine’s PEP02 obtained positive results from phase III trials, and once shipments for contract-manufactured doxorubicin started.
4.4
0.20.6 0.4 1.6
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2008 2009 2010 2011 2012 2013 2014 2015
(USDbn)
NovoSeven
RemicadeNeumega Kogenate
EpogenProcrit
AranespEnbrel
BetaseronHumulin Novolin Intron A Regranex
Human growth hormone
Neupogen
BeneFIXInfergen
HumaLogNovoLog Rituxan Avonex Rebif
Cerezyme
Lantus Avastin
Neulasta Synagis Tysabri
Sandostatin LAR
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Risks to our recommendation
• A lower-than-expected revenue contribution from the contract manufacturing of doxorubicin with J&J.
• A delay in Merrimack’s progress on liposomal irinotecan for pancreatic cancer would affect PharmaEngine’s (in which TTY Biopharm holds a 22% stake) recognition of milestone fees. In addition, any delay to the schedule or failure to receive approval would be a downside risk to earnings growth.
• A delay in ramping up the manufacture of several key products in the pipeline – such as typosome for Lipo AB, cefoperazone/sulbactam (C+S) and Leuprolide.
• Higher-than-expected operating expenses, especially from TTY Biopharm’s China subsidiaries, due to the development of new drugs.
TTY Biopharm: one-year forward PER chart QFII holding
Source: TEJ, Daiwa forecasts Source: TEJ, Daiwa forecasts
Peer valuations BBG Target Share Mkt cap Turnover PER PBR EPS YOY ROE(%) Dividend yield
Company code Rating price price (USDm) (USDm) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014ETaiwan-listed companies TTY Biopharm 4105 TT Buy 120 99.7 777 4 44.3 26.8 16.9 6.8 5.2 3.9 4 47 58 17 22 27 1 1 1Scinopharm 1789 TT Outperform 90 83.8 1,893 6 38.8 39.6 32.3 5.0 5.7 5.2 19 18 23 13 15 17 1 1 1Yungshin Pharma 3705 TT NR NR 49.5 419 1 23.3 21.5 20.7 1.9 n.a. n.a. -20 32 4 8 n.a n.a 4 n.a n.aChina Chemical & Pharm 1701 TT NR NR 21.6 215 2 19.2 16.7 n.a 1.3 n.a. n.a. 5 19 n.a 7 n.a n.a 2 n.a n.aGlobal-listed companies Johnson & Johnson JNJ US NR NR 86.4 243,510 853 14.3 15.8 14.8 3.0 3.3 2.9 11 39 7 17 21 19 3 3 3Forest Labs FRX US NR NR 42.5 11,417 62 9.3 113.7 44.3 1.6 2.1 2.0 -1 -90 156 17 2 5 0 0 0.0Vivus inc VVUS US NR NR 12.5 1,264 30 n.a. -6.6 -11.3 6.1 41.8 n.a. 158 34 -42 -64 -634 89 0 n.a. n.a.Jiangsu Hengrui Medicine 600276 CH NR NR 32.0 7,115 41 34.5 34.4 26.2 7.1 6.7 5.5 23 18 31 21 19 21 0 0 1Zhejiang Hisun Pharma 600267 CH NR NR 15.8 2,169 29 41.4 42.4 31.2 2.7 2.5 2.3 -41 4 36 6 6 7 1 1 1Guangzhou Baiyanshan Pharma 600332 CH NR NR 33.3 6,649 512 22.7 46.8 32.7 2.2 6.0 5.0 37 46 43 10 13 15 0 0 0.0Tasly Pharm 600535 CH NR NR 42.5 7,171 296 37.1 39.5 31.1 7.1 7.6 6.1 26 44 27 19 19 20 0 1 0.0Jiangsu Nhwa Pharm 002262 CH NR NR 25.3 1,355 36 45.6 44.6 33.7 9.4 9.5 7.5 32 33 32 21 21 22 0 0 0National Jinghua Pharm 002349 CH NR NR 11.3 368 24 38.6 36.3 31.3 3.0 n.a. n.a. 2 26 16 8 n.a. n.a. 0 n.a. n.a.Dr. Reddy'S Labs DRRD IN NR NR 2,292.9 5,916 13 23.0 24.7 21.4 6.0 5.7 4.5 30 21 15 26 23 21 1 1 1Sun Pharma SUNP IN NR NR 521.2 16,383 19 22.8 33.1 26.0 4.9 7.3 6.2 42 26 27 21 22 24 0 1 1
Source: Bloomberg, Daiwa estimates
Note: prices as of close on 30 August 2013
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TTY Biopharm: DCF model Economic profit valuation TWDm % Discounted cash flow valuation TWDm %Adjusted opening invested capital 4,938.8 18 Value of phase 1: explicit (2013-15) 1,584.5 6NPV of economic profit during explicit period 1,752.2 6 Value of phase 2: value driver (2016-30) 9,506.7 34NPV of econ profit of remaining business (1, 2) 6,072.2 22 Value of phase 3: fade (2031-52) 13,002.1 47NPV of econ profit of net investment (growth business) (1, 3) 14,862.1 54 Terminal value 3,476.1 13Enterprise value 27,625.3 100 Enterprise value 27,569.3 100Plus: other assets 0.0 0 FCF growth rate at end of phase 1 implied by DCF valuation 4.7Less: minorities 0.0 0 FCF growth rate at end of phase 1 implied by current price 4.0Less: net debt (as at 19 Aug 2013) -458.4 -2Equity value 28,083.7 102 Returns, WACC and NPV of free cash flow No. shares (m) 233.0
Per share equity value 120.00Current share price 99.7Sensitivity No of years in fade period #REF! 0 5 10 15 20
WAC
C
6.9% 185.00 113.00 129.00 147.00 165.007.9% 148.00 100.00 112.00 125.00 138.008.9% 122.00 88.00 97.00 107.00 116.009.9% 102.00 78.00 85.00 92.00 99.00
10.9% 86.00 70.00 75.00 80.00 85.00Performance summary Phase 2 avg 2013E 2014E 2015E (2016 – 2030E)Invested capital growth (%) 13.4 16.7 3.7 11.6Operating margin (%) 13.9 25.5 24.2 21.1
Capital turnover (x) 1.1 1.5 1.3 1.3
Source: Daiwa estimates
Company background
Founded in 1960, TTY Biopharm started as a pharmaceutical company focusing on the production and sales of generic drugs. Over the past 17 years it has transformed itself into a pharmaceutical conglomerate, with a focus on various parts of the value chain, ranging from developing branded generics to innovative drugs. TTY Biopharm: current product portfolio Cancer Indication Markets Asadin APL Taiwan, Thailand, Malaysia, Philippines, Vietnam Gemmis Lung cancer Taiwan, Malaysia, Vietnam, Sri Lanka, Nigeria Lipo-Dox Kaposi's sarcoma Taiwan, Thailand, Vietnam, Sri Lanka
Oxalip Colorectal cancer Taiwan, Thailand, Vietnam, Singapore, Nigeria, Sri Lanka
Tyxan Breast cancer Taiwan, Austria, Germany, Sweden, Other EU members
Thado Multiple myeloma Taiwan, Philippines, Malaysia Ufur Gastric cancer Taiwan, Thailand, Vietnam, Malaysia, India, Pakistan TS-1 Gastric cancer Taiwan, China Zobonic Multiple myeloma Taiwan Infectious disease Cubicin Antibiotics Taiwan
Source: Company
TTY Biopharm: major investments Ownership Category Area of focus
Taiwan PharmaEngine (智擎生技)
22.1% New drug development Cancer
TSH Biopharm (東生華製藥)
56.5% Manufacturing/Sales & marketing
Cardiovascular/Gastrointestinal /auto-immune
Mainland China WorldCo (榮港生技) 100.0% Regulatory approval/sales
& marketing Liver/ID/CNS
TOT Biopharm (東曜) 40.9% R&D/manufacturing Specialty-drug/ biologics
XDHP (旭東海普) 22.0% Manufacturing/Sales & marketing
Emergency cardiovascular
Source: Company
Management team The company’s chairman, Lin Jung-Chin, is instrumental in the company’s success. He took the helm of the company in 1994 when TTY Biopharm had serious operational issues, and restructured the company in 1996. Mr. Lin subsequently led TTY Biopharm through different phases of transformation, from it being a generic manufacturer to a branded generics developer and further to becoming a new drug innovator. Mr. Lin currently serves as chairman of eight other pharmaceutical companies. TSH Biopharm (8432 TT) Founded in 2010, 54%-owned subsidiary TSH Biopharm focuses on drug development for chronic diseases, specifically in the areas of cardiovascular, gastrointestinal, and central nervous system. It mainly markets three products, Mopride (cardiovascular),
(200)
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Phase 1 NPV of FCF (RHS) Phase 2 NPV of FCF (RHS)Phase 3 NPV of FCF (RHS) Total Business ROICGrowth Business ROIC Remaining Business ROICWACC
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Amtrel (cardiovascular), and Catilon (gastrointestinal) in Taiwan. As of 2012, cardiovascular and gastrointestinal drugs combined accounted for more than 86% of its total revenue. TSH Biopharm: revenue by category (2012)
Source: Company
TSH Biopharm: pipeline
Indication Est. time of launch Market
A11 Hypertension 2015 Taiwan R06 Angina Pectoris 2016 Taiwan C04 Cardiac failure 2016 Taiwan/China D07 Hypotension 2020 Taiwan Biologics E11 Rheumatoid arthritis 2016 Taiwan T11 Osteoporosis 2020 Taiwan/Global
Source: Company
WorldCo Established in 2005, 100%-owned subsidiary WorldCo markets and distributes products for domestic and international pharmaceutical companies. Its principal products include Hepa-Merz and Contractubex, both of which are developed by Merz Pharma, a German-based pharmaceutical company focusing on the research and development of drugs for neurological and clinical dermatology indications. According to Merz Pharma, sales of its non-prescription drugs, mainly comprising Hepa-Merz, Contractubex, and Pantogar, increased by 8.8% YoY for 2012.
XDHP Shanghai Founded in 1925 in Shanghai, and becoming a subsidiary of TTY Biopharm in 1993, XDHP’s drug portfolio mainly includes non-oncology injectables. Specifically, it focuses on therapeutic areas such as cardiovascular, antibiotics, gastrointestinal and antieoplastic. Injectable products accounted for 78% of its total sales in 2008. XDHP: revenue breakdown by product (2008)
Source: Company
XDHP operates Good Manufacturing Practice-certified production facilities in Jinqiao, Jiading, and Chengdu. Its Jinqiao facility has an annual capacity of 250 million vials. The Jiading facility is used to manufacture tablet, capsule, oral solution, suspension products. TOT Biopharm TOT Biopharm is TTY Biopharm’s principal China-based subsidiary that focuses on the research and development of oncology and biologics drugs. According to the company, TOT Biopharm has become one of the leading cancer drug companies in China, with annual sales of TWD15bn in 2010 and an 8% market share in China.
Cardiovascular 48.0%
Gastroinstestinal
38.0%
Others 14.0%
Injectible 78.3%
Tablet10.4%
Capsule 4.2%
Suspension 2.7%
Oral solution 3.7% Others
0.7%
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See important disclosures, including any required research certifications, beginning on page 53
■ Investment case We initiate coverage of Scinopharm Taiwan (Scinopharm), a leading process R&D and active pharmaceutical ingredient (API) manufacturing provider to the pharmaceutical industry globally, with an Outperform (2) rating. We believe that over the long term the company has a strong API pipeline. Despite short-term capacity constraints, we expect earnings growth over the next few years to be driven by profit-margin expansion. ■ Catalysts Contract-manufacturing business should provide high earnings growth. We forecast a revenue CAGR for the contract research and manufacturing (CRAM) business of 30% for 2012-15, higher than our forecast of a 15% CAGR for the company as a whole for the same period. Qsymia, a drug for obesity, and the anti-depressant drug, Viibryd, should be the two
main revenue drivers over the next three years. Cancer API revenue growth should accelerate in 2015. We expect the company’s API revenue to increase faster than the industry revenue rate from 2015 on the back of its strong pipeline. In the API space, we expect Scinopharm to prioritise the manufacture of high-margin cancer products to improve profitability in a period of capacity constraints. Capacity constraints a short-term issue, but margin expansion should continue. Sales growth for 2013 is likely to be affected by capacity constraints. However, we expect new API capacity from China in 2015 to see sales growth accelerate. For 2012-15, we forecast an earnings CAGR of 22%, outpacing the 15% sales CAGR. ■ Valuation Our DCF-based six-month target price of TWD90 is equivalent to a 2014E PER of 35x, close to the stock’s all-time high. The shares are trading currently at a 2014E PER that is largely inline with its China peers, based on the Bloomberg consensus; however, with a strong pipeline and stronger cash position, we believe Scinopharm deserves to trade at a premium to them.
■ Risks Among the downside risks to our view are: 1) faster-than-expected price falls for generic APIs due to increased competition, and 2) lower-than-expected market demand for branded drugs affecting the contract-manufacturing business.
Health Care / Taiwan1789 TT
2 September 2013
ScinoPharm Taiwan
Initiation: a strong pipeline
• Contract manufacturing should result in strong earnings growth over the next three years
• Generic APIs for high-entry-barrier cancer drugs likely to help achieve higher-than-industry growth rate in this space
• Earnings growth likely to come from margin expansion, despite short-term capacity constraints; initiate with Outperform rating
Source: FactSet, Daiwa forecasts
Health Care / Taiwan
ScinoPharm Taiwan1789 TT
Target (TWD): 90.00Upside: 7.4%30 Aug price (TWD): 83.80
BuyOutperform (initiation)
HoldUnderperformSell
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Share price performance
ScinoPharm (LHS)Relative to TWOTCI (RHS)
(TWD) (%)
12-month range 52.78-86.05Market cap (USDbn) 1.893m avg daily turnover (USDm) 6.22Shares outstanding (m) 676Major shareholder UPEC (38.0%)
Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 5,140 5,897 6,919Operating profit (m) 1,643 2,048 2,494Net profit (m) 1,431 1,754 2,133Core EPS (fully-diluted) 2.118 2.595 3.156EPS change (%) 17.6 22.5 21.6Daiwa vs Cons. EPS (%) (4.0) (9.5) n.a.PER (x) 39.6 32.3 26.6Dividend yield (%) 1.4 1.7 2.0DPS 1.2 1.4 1.7PBR (x) 5.7 5.2 4.8EV/EBITDA (x) 25.5 21.4 17.9ROE (%) 15.1 17.0 18.8
Christine Wang(886) 2 8758 [email protected]
How do we justify our view?How do we justify our view?
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Growth outlook Scinopharm: net profit and YoY change
We forecast Scinopharm’s earnings to increase by more than 20% YoY over the next three years, despite capacity constraints in the short term. We believe the company would prioritise the manufacture of its high-margin cancer products given the capacity constraints, and that its profit-margin will continue to rise into 2014.
Source: Company, Daiwa forecasts
Valuation Scinopharm: one-year forward PER
Our six-month target price of TWD90 is based on a DCF valuation (please refer to p.46 for a breakdown). This is equivalent to a 2014E PER of 35x, close to the stock’s all-time high. The stock is trading currently at a 2014E PER that is largely inline with that of its China peers (based on the Bloomberg-consensus forecasts). However, given its strong pipeline to global clients and stronger cash position, we believe Scinopharm should trade at a premium to its China peers.
Source: TEJ, Daiwa forecasts
Earnings revisions Scinopharm: consensus EPS-forecast revisions
The Bloomberg-consensus 2014 EPS forecast has beenraised continuously since early this year. We expect the consensus to raise its 2014 earnings forecast further once the higher-than-expected revenue growth potential from the contract manufacturing business and cancer APIs from the US and Japan are realised.
Source: Bloomberg
How do we justify our view?
Growth outlook
Valuation
Earnings revisions
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Taiwan Healthcare Sector 2 September 2013
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Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EAPI rev YoY % n.a. 24 0 (6) (1) (2) 7 18CRAM rev YoY % n.a. (7) 64 97 102 49 27 16Oncology rev of total sales % 65 72 69 52 50 47 45 45
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EGeneric API 2,833 3,518 3,526 3,325 3,292 3,235 3,476 4,102CMO &CRO 211 195 321 633 1,280 1,904 2,421 2,817Other Revenue 108 99 44 (4) 0 0 0 0Total Revenue 3,151 3,813 3,891 3,954 4,573 5,140 5,897 6,919Other income 0 0 0 0 0 0 0 0COGS (1,489) (1,914) (1,857) (1,969) (2,259) (2,334) (2,628) (3,034)SG&A (368) (405) (509) (560) (751) (844) (902) (1,052)Other op.expenses (238) (328) (302) (291) (303) (319) (318) (339)Operating profit 1,056 1,166 1,223 1,133 1,259 1,643 2,048 2,494Net-interest inc./(exp.) (71) (29) (0) 18 30 40 40 40Assoc/forex/extraord./others (68) (33) (27) (16) 83 1 (25) (25)Pre-tax profit 917 1,104 1,196 1,135 1,372 1,684 2,063 2,509Tax (43) (64) (156) (174) (201) (253) (310) (376)Min. int./pref. div./others (2) 2 0 (2) 0 0 0 0Net profit (reported) 872 1,041 1,040 959 1,170 1,431 1,754 2,133Net profit (adjusted) 872 1,041 1,040 959 1,170 1,431 1,754 2,133EPS (reported)(TWD) 1.582 1.888 1.705 1.520 1.801 2.118 2.595 3.156EPS (adjusted)(TWD) 1.582 1.888 1.705 1.520 1.801 2.118 2.595 3.156EPS (adjusted fully-diluted)(TWD) 1.582 1.888 1.705 1.520 1.801 2.118 2.595 3.156DPS (TWD) 0.000 0.000 0.000 0.100 1.000 1.189 1.398 1.713EBIT 1,056 1,166 1,223 1,133 1,259 1,643 2,048 2,494EBITDA 1,430 1,540 1,589 1,481 1,623 2,093 2,498 2,944
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 917 1,104 1,196 1,135 1,372 1,684 2,063 2,509Depreciation and amortisation 374 374 367 348 363 450 450 450Tax paid (43) (64) (156) (174) (201) (253) (310) (376)Change in working capital 201 (158) (40) (175) (477) 100 (288) (393)Other operational CF items (40) 43 197 161 (35) 119 119 119Cash flow from operations 1,408 1,298 1,564 1,294 1,021 2,101 2,035 2,309Capex (145) (191) (349) (761) (873) (925) (1,061) (533)Net (acquisitions)/disposals 0 0 (226) 0 0 0 0 0Other investing CF items (3) (29) (27) (48) 13 0 0 0Cash flow from investing (148) (220) (602) (810) (860) (925) (1,061) (533)Change in debt (813) (1,012) (941) (2) 263 0 0 0Net share issues/(repurchases) 0 0 1,173 957 0 0 0 0Dividends paid 0 0 0 (61) (631) (773) (945) (1,158)Other financing CF items (48) 4 4 2 1 0 0 0Cash flow from financing (860) (1,007) 235 896 (368) (773) (945) (1,158)Forex effect/others 12 (14) (29) 5 (52) 0 0 0Change in cash 413 57 1,169 1,385 (259) 403 29 619Free cash flow 1,264 1,107 1,215 533 148 1,176 973 1,776
Financial summary
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Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
Company profile
Founded in 1997, ScinoPharm is a leading API supplier to the global pharmaceutical and biotechnology industry. It provides a full range of API services from process development, production of early phase clinical trial material to large-scale manufacturing for commercial launches. ScinoPharm operates manufacturing facilities in both Taiwan and China and supply API and CRAM services in diverse geographies.
As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 683 785 1,916 3,296 3,035 3,439 3,468 4,086Inventory 1,308 948 1,244 1,465 1,870 1,723 1,940 2,240Accounts receivable 379 918 753 892 938 1,028 1,180 1,384Other current assets 234 120 165 209 215 215 215 215Total current assets 2,604 2,771 4,078 5,863 6,059 6,405 6,803 7,925Fixed assets 2,900 2,782 2,812 3,227 3,790 4,265 4,877 4,960Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 258 271 408 390 464 464 464 464Total assets 5,761 5,824 7,298 9,480 10,313 11,135 12,144 13,349Short-term debt 7 0 0 0 264 264 264 264Accounts payable 296 325 440 640 594 637 718 829Other current liabilities 153 357 155 203 330 330 330 330Total current liabilities 456 683 595 843 1,187 1,231 1,311 1,422Long-term debt 1,844 647 1 0 0 0 0 0Other non-current liabilities 21 22 25 28 30 30 30 30Total liabilities 2,321 1,352 621 871 1,218 1,261 1,342 1,452Share capital 5,514 5,514 6,100 6,310 6,499 6,759 6,759 6,759Reserves/R.E./others (2,075) (1,042) 577 2,298 2,595 3,113 4,041 5,136Shareholders' equity 3,439 4,472 6,677 8,608 9,094 9,872 10,800 11,895Minority interests 2 0 (0) 2 2 2 2 2Total equity & liabilities 5,761 5,824 7,298 9,480 10,313 11,135 12,144 13,349EV 57,813 56,505 54,728 53,349 53,873 53,469 53,441 52,822Net debt/(cash) 1,168 (138) (1,915) (3,296) (2,772) (3,175) (3,204) (3,822)BVPS (TWD) 6.236 8.111 10.946 13.641 13.992 14.605 15.979 17.598
Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 26.4 21.0 2.0 1.6 15.7 12.4 14.7 17.3EBITDA (YoY) 52.6 7.7 3.2 (6.8) 9.6 29.0 19.4 17.9Operating profit (YoY) 64.8 10.4 4.8 (7.3) 11.1 30.5 24.7 21.8Net profit (YoY) 42.2 19.4 (0.1) (7.8) 22.0 22.3 22.5 21.6Core EPS (fully-diluted) (YoY) 42.1 19.4 (9.7) (10.8) 18.5 17.6 22.5 21.6Gross-profit margin 52.8 49.8 52.3 50.2 50.6 54.6 55.4 56.2EBITDA margin 45.4 40.4 40.8 37.5 35.5 40.7 42.4 42.6Operating-profit margin 33.5 30.6 31.4 28.7 27.5 32.0 34.7 36.1Net profit margin 27.7 27.3 26.7 24.3 25.6 27.8 29.7 30.8ROAE 29.2 26.3 18.7 12.6 13.2 15.1 17.0 18.8ROAA 15.3 18.0 15.9 11.4 11.8 13.3 15.1 16.7ROCE 20.0 22.4 20.7 14.8 14.0 16.9 19.3 21.5ROIC 20.9 24.6 23.4 19.0 18.5 21.4 24.4 27.1Net debt to equity 34.0 net cash net cash net cash net cash net cash net cash net cashEffective tax rate 4.7 5.8 13.0 15.3 14.7 15.0 15.0 15.0Accounts receivable (days) 54.5 62.1 78.4 75.9 73.0 69.8 68.3 67.6Current ratio (x) 5.7 4.1 6.9 7.0 5.1 5.2 5.2 5.6Net interest cover (x) 14.8 40.1 5,712.9 n.a. n.a. n.a. n.a. n.a.Net dividend payout 0.0 0.0 0.0 5.9 65.8 66.0 66.0 66.0Free cash flow yield 2.2 2.0 2.1 0.9 0.3 2.1 1.7 3.1
Financial summary continued …
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A strong pipeline
Company’s range of cancer APIs should ensure long-term earnings growth.
Key investment theme
Company background Scinopharm, which supplies APIs on a made-to-order basis for both generics and new drugs, is Taiwan’s biggest healthcare company in terms of market capitalisation. Initiating coverage with an Outperform rating We like Scinopharm’s prospects given the earnings drivers we see ahead.
• We expect the contract-manufacturing business for branded new drugs to provide robust earnings growth over the next three years. Over 2012-15, we forecast the CRAM business to see a 30% revenue CAGR, which is higher than the 15% CAGR we forecast for the company as a whole over the period.
• Scinopharm is the leading provider of cancer APIs for generics to customers worldwide. We expect this to be an important earnings-growth driver for the company in the future on the back of its strong pipeline in this field. It is developing 2-4 new cancer APIs in order to broaden its exposure in this space.
• Since 2006, the company has been expanding its pool of customers in India, as companies there have significant exposure to the US and EU markets. In the future, the company plans to collaborate more with Japan pharmaceutical companies and China partners to sell its products in these two countries, which are the biggest generic API markets in Asia.
• From 2017, the company plans to have its operations vertically integrated with its downstream injectables manufacturing business in order to provide a one-stop-shop service to its customers. This would help solve the current supply shortage for its customers and strengthen its relationship with customers, which should also help Scinopharm’s future product pipeline.
• The capacity constraints being faced by the company should be temporary and we do not believe they will affect its gross-profit margin expanding. We believe Scinopharm will prioritise the production of higher-margin cancer APIs given the current capacity constraints. The company’s capacity will start to increase from 1H14 after production starts to be ramped up at phase 2 of its plant in Changsu, China, and it will see a meaningful capacity increase in 2015 once it receives approval for API production in China. Earnings growth should step up a gear from 2017, when its injectables plant in Changsu starts production.
Driver 1: CRAM business
The CRAM business should be an important earnings driver for Scinopharm over the next few years. For 2012-15, we forecast this business to see a 30% revenue CAGR, which is higher than the 15% CAGR we forecast for the company as a whole. In addition, we forecast the CRAM business to account for about 37% of total revenue for 2013, up from 28% for 2012, and a lot higher than the range of 5-10% over 2008-10. The proportion is set to rise further as the company is likely to prioritise this business over that for APIs given the current production-capacity constraints. Scinopharm: breakdown of sales for API and CRAM businesses (2013-15E)
Source: Company, Daiwa forecasts
We discuss the current two key products lines in the CRAM business in the following paragraphs. Topiramate for Qsymia Qsymia, the obesity drug from US company Vivus, was launched in September 2012 in the US. The drug’s competitor, Belviq, from Arena Pharmaceuticals of the US, has been on the market since 2Q13. These two
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2008 2009 2010 2011 2012 2013E 2014E 2015E
API CRAM
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drugs were the first obesity drugs approved by US FDA in over a decade. The number of people in the US last year that were obese was estimated by Orexigen to be about 100m, which is almost one third of the country’s total population. Qsymia contains a combination of two APIs – topiramate and phentermine – and Scinopharm is the sole supplier of topiramate for Qsymia. Based on past drug take-up patterns, we expect the company’s shipments of topiramate to continue to rise over the next 4-5 years until sales volume peaks. Topiramate: assumptions and forecast US 2012 2013E 2014E 2015EObese population (m) (est.) 102 105 108 111Qsymia use as a % of obese population (est.) 0.01% 0.03% 0.06% 0.10%Number of patients 5,100 26,265 64,927 111,458Qsymia sales (USDm) 2 35 88 150Scinopharm topiramate (USDm) 2 30 37 42
Source: IMS Health research, Daiwa estimate and forecasts
In addition, we expect sales of topiramate this year to be as high as those for Scinopharm’s best-selling API, vilazodone (an API used in a drug to treat depression), and to be an important earnings driver for the company over the next three years. Topiramate and vilazodone: percentage of sales
Source: Daiwa forecasts
Vilazodone for Viibryd Vilazodone is the API for Viibryd, an anti-depressant drug from Forest Laboratories of the US. The global anti-depressant drug market is valued at USD12bn, according to the WHO, and Viibryd currently accounts for less than a 1% market share globally. Forest Laboratories is positive on the sales outlook and expects its Viibryd sales to reach USD220m for 2014 (stated by the company at an analyst meeting in April 2013), up from USD31.5m for 2011 (ie, a revenue CAGR of 92% over 2011-14).
Forest Laboratories targets Viibryd to replace its best-selling anti-depressant, Lexapro, which lost its patent protection in 2012. However, Lexapro’s sales peaked at USD2.3bn for 2008, and became the second-largest selling antidepressant in the US five years after its launch. It is difficult to see Viibryd catching up with Lexapro in terms of peak sales given the current pace of its market-share gain, but it should be possible for it to account for a 1% share of the US antidepressant market by 2014, based on the company’s guidance. Leaders in the global antidepressant market Drug Brand Patent Expiry Peak sales (USDm)Cymbalta Eli Lilly 2013 3,920 Lexapro Forest Laboratories 2013 2,300 Pristiq Pfizer 2022 500 Paxil GSK 2003 2,700 Effecor Pfizer 2010 260
Source: Company
Breakdown of the leading global antidepressants
Source: Companies
Scinopharm is the sole supplier of vilazodone for Viibryd. Vilazodone accounted for more than 70% of the company’s CRAM business for 2011, and shipments only started in 2H11. We forecast vilazodone to account for more than 35% of Scinopharm’s CRAM business sales before 2017, even with the production of topiramate being ramped up for Qsymia. In addition, the increase in the gross margin for vilazodone – from 20-30% over 2011, to 40-50% over 1H13 – was due largely to production-process enhancement and yield-rate improvements. On the back of this, we forecast the company’s overall gross margin to be stable at about 50% over the next three years. Assumptions and forecasts for vilazodone US 2011 2012 2013E 2014E 2015ETotal antidepressant population in US (m) 14.8 14.8 15 16 16Viibryd use as a % of patients 0.15% 0.27% 0.75% 1.00% 1.15%Number of patients for Viibryd 22,200 39,220 114,330 157,013 185,982Viibryd sales (USDm) 32 56 163 223 264Scinopharm Vilazodone (USDm) 15 29 22 28 34
Source: IMS Health research, Daiwa estimates and forecasts
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100%
2011 2012 2013E 2014E 2015E
Topiramate Vilazodone
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3,000
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5,000
6,000
7,000
8,000
2007 2008 2009 2010 2011 2012
(USDm)
Effex or Pax il Cymbalta Lex apro Pristiq
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Driver 2: generic APIs for cancer
API producers either sell APIs on the open market (merchant market) or use them in their own formulation manufacturing. According to Frost & Sullivan, the global market for APIs was valued at USD86bn for 2010. It forecasts the market to be worth USD109bn for 2015. In addition, the generic API sales CAGR it forecasts for 2010-15, of 7%, is higher than the 3% CAGR it expects for branded APIs. Global API market sales & growth forecasts (2010-15)
Source: Frost & Sullivan
Scinopharm plays an important role in the supply chain as the company supplies the APIs to the generic-drug makers. A key competitive strength for the company is its relationships with the generic-drug companies and R&D efforts, as it aims to have strong a drug master file (DMF) profile to secure its future pipeline. Competition from India and China is intense, and companies from these two countries are gaining share in the generic API market globally. It is therefore important for Scinopharm to differentiate itself from these players, and so it is focusing on the high-entry-barrier API market.
Generic API market share by country of production
Source: Frost & Sullivan
US FDA: Type II DMF filings
Source: US FDA
Scinopharm’s generic API strategy
Focus on cancer drugs. Scinopharm mainly focuses on cancer APIs with high entry barriers and considerable sales-growth potential in order to differentiate itself from its India and China competitors. Among the 44 DMFs in the US, 20 of them are for cancer. Revenue breakdown by indication (2012)
Source: Company
86.8 91.2 95.5 99.9 104.4 108.9
5.1%4.7% 4.6% 4.6%
4.3%
0%
1%
2%
3%
4%
5%
6%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2010 2011 2012 2013 2014 2015
(USD100m)
Market size (LHS) Growth (RHS)
31.1% 35.6% 37.0%
13.5%22.1%
33.3%18.1%
16.3%
14.7%37.3%26.0%
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100%
2005 2010 2015E
China India Italy Rest of the world
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50
100
150
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250
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450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India China Italy US
Oncology 50.0%
CNS 39.0%
Others 11.0%
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High-potency APIs (HPAPI), such as cancer APIs, usually have small dosage requirements. They require highly sophisticated facilities and specialised technical capabilities for their manufacture. As such, the production facilities typically require large amounts of investment and there are stringent safety and handling specifications, making the entry barriers to this area high. The average gross margin for cancer generic APIs is more than 60%, much higher than the level of about 30% for non-cancer generic APIs. According to GBI Research, the global HPAPIs market had a revenue value of USD7.5bn for 2009, and accounted for about 10% of the total API market. It expects revenue for the global HPAPI market to increase at a CAGR of 8.4% over 2010-15. Among the sub-segments, it forecasts the anti-cancer segment to grow the fastest, at a CAGR of 12.6% globally over the same period. The US is the largest market for cancer, accounting for 43% of the total for 2009, followed by the top-five EU markets (Germany, the UK, France, Italy, and Spain) at 24%, according to Frost & Sullivan. Spending on cancer therapies is seeing the fastest rise in the pharmaceutical industry globally at present. The WHO estimates that the number of cancer deaths in the world will increase from 7.9m for 2007 to 11.5m for 2030, representing an increase of 45%. In addition, cancer is the biggest area for drug development currently, so the biotech/pharmaceutical companies involved in this area are likely to need high levels of cancer APIs in order to facilitate their clinical trials in the future. Medicines in development in the US (2012
Source: PhRMA 2012
US: spending by therapeutic area
Source: The Use of Medicines in the United States: Review of 2011 by IMS
Note: Percentage denotes cancer as % of total market; in the graph, we only include the top 7 therapeutic areas
Leveraging on its India customers to enter the Europe market. More US and EU pharma companies are outsourcing the manufacture of formulations to India, because the country has a mature pharma industry, low-cost production, quality that is comparable to that of developed countries, and language skills. Scinopharm estimates that 22% of global generic drugs come from India, and expects the level to increase to 30% over the next three years. Moreover, a high percentage of India pharma companies have met US FDA standards. As such, India is one of the most competitive routes for Scinopharm to gain access to the Europe markets with its APIs. Scinopharm’s customer base in India has been increasing, and currently it has more than 40 customers there. Eight of the top-10 India pharmaceutical companies in terms of India pharma market share are Scinopharm’s customers. This helped the company to boost its sales from India from 4% of the total for 2008, to 20% for 2012. We expect sales from India to continue to be an important driver of Scinopharm’s earnings in the coming years. Scinopharm: customers in India
Source: Company
948
398255 252 212
141 139 132 88 85 85 72 24
460
0100200300400500600700800900
1,000
Canc
er
Resp
irato
ry d
isor
ders
Men
tal d
isor
ders
Card
iova
scul
ar
Diab
etes
mel
litus
Lung
can
cer
Leuk
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Brea
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ance
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HIV/
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Colo
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Alzh
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6.5%
6.9%7.1% 7.2% 7.3%
6.0%
7.0%
8.0%
0
100
200
2007 2008 2009 2010 2011
(USDbn)
Oncologic Respiratory agents Lipid regulators Antidiabetics Antipsychotics Autoimmune diseases Antidepressant HIV antivirals
13
3
85
8
2 3
1316
24
29
3739
42
0
5
10
15
20
25
30
35
40
45
2006 2007 2008 2009 2010 2011 2012 (est.)
# of new additions # of accumulated customers
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Japan offers considerable future potential. According to GBI Research, Japan is the second-largest pharmaceutical market in the world. It is also the largest API market in Asia, with a 51% share, much higher than that for China (21%) and India (6%). However, it is difficult for non-Japan-made generic drugs to gain traction in this market, because physicians and patients are wary of generic drugs from overseas, especially from China and India companies. As such, Scinopharm needs to develop Japanese pharmaceutical customers in order to increase its sales in this market. Japan is the largest API market in Asia
Source: GBI Research (Nov 2012)
Scinopharm has been making efforts to increase its number of Japanese pharmaceutical customers. It had no customers there in 2008, but has 10 currently, and targets to add two more next year. Sales from Japan accounted for 4% of total sales in 2012, and we forecast this to increase to 5% this year on the back of a rise in customers. There is still limited demand for generics in Japan, where they accounted for only 25% of the total drugs market in terms of sales for 2012, compared with about 80% in both the US and UK markets. The Japan Government aims for generic drugs to account for 60% of the market by 2018. As such, we believe Japan provides a good sales-growth opportunity for Scinopharm’s generic business.
Scinopharm: customers in Japan
Source: Company, Daiwa forecasts
Key products that may drive generic API drug revenue growth Scinopharm has a strong pipeline and has multiple product launches every year. This year, it has launched docetaxel and paclitaxel in Japan. We forecast a revenue CAGR of about 8% YoY for the company’s generic API segment for 2012-15. Also, the company is planning to launch three new cancer APIs (capecitabine, azacitidine and decitabine) this year in the US. As such, and despite our expectation of strong sales growth for the contract manufacturing organisation (CMO) business this year, we forecast the company’s cancer-drug business to account for about 50% of total sales for 2H13. Scinopharm: key products launched YTD in 2013
API Region Indications Brand
marketer
Regional sales
(USDm)
Worldwide sales
(USDm) Azacitidine US MDS, anti-neoplastic Pharmion 331.3 729.7 Decitabine US MDS, anti-neoplastic MGI
Pharma 238.0 249.1
Docetaxel Anhydrous, Trihydrate
JP Anti-neoplastic Sanofi Aventis
236.9 2,051.0
Modafinil US Antinarcolepsy Cephalon 1,219.0 1319.0 Paclitaxel JP Anti-neoplastic Bristol
Myers 307.1 1654.0
Riluzole US ALS Sanofi Aventis
55.0 237.1
Topiramate US Seizures Vivus NDA (FDA tentative approval)
Source: Company
Japan 51%
China 21%
India 6%
Korea 8%
Others 14%
0
2
4
6
8
10
12
2006 2007 2008 2009 2010 2011 2012 2013E 2014E
# of accumulated customers
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Valuation and target price
Outperform (2) rating and target price of TWD90 We initiate with a positive call on Scinopharm, because:
• We expect earnings growth for 2013-14 to be driven by the company’s strong cancer API pipeline and by its contract manufacturing business for two new drugs, Qsymia and Viibryd.
• We do not expect short-term production-capacity constraints to affect 2013-14 earnings growth, as we
believe the company will prioritise making higher-margin cancer APIs, which means its gross margin should continue to rise (we forecast it to be 54.6% for 2013 and rise to 55.4% for 2014). We forecast an earnings CAGR of 22% for 2012-15, higher than our revenue-CAGR forecast of 15% over the same period.
Our six-month target price of TWD90 is based on our DCF valuation (see the following table for details). This translates into a 2014E PER of 35x, which is close to the stock’s all-time high.
Scinopharm: DCF model Economic profit valuation TWDm %Adjusted opening invested capital 6,831.4 12NPV of economic profit during explicit period 2,644.7 5NPV of econ profit of remaining business (1, 2) 15,515.6 27NPV of econ profit of net investment (growth business) (1, 3) 33,274.2 57Enterprise value 58,265.9 100Plus: other assets 0.0 0Less: minorities 0.0 0Less: net debt (as at 20 Aug 2013) -3,175.2 -5Equity value 61,441.1 105No. shares (m) 675.9 Per share equity value (TWD) 90.00 Current share price (TWD) 83.80
DCF valuation TWDm %Value of Phase 1: explicit (2013-15) 2,544.5 4Value of Phase 2: value driver (2016-30) 22,154.1 38Value of Phase 3: fade (2031-52) 27,327.5 47Terminal value 6,187.3 11Enterprise value 58,213.4 100FCF growth rate at end of phase 1 implied by DCF valuation 5.9FCF growth rate at end of phase 1 implied by current price 5.7 Returns, WACC and NPV of free cash flow
Sensitivity analysis No. of years in phase 3 (TWD) #REF! 0 5 10 15 20
WACC
141.00 81.00 93.00 107.00 122.007.5% 113.00 72.00 81.00 92.00 103.008.5% 93.00 64.00 71.00 79.00 87.009.5% 78.00 57.00 63.00 69.00 75.0010.5% 66.00 51.00 56.00 60.00 65.00
Performance summary 2013E 2014E 2015E Phase 2 avg Invested capital growth (%) 5.9 13.4 6.3 12.2Operating margin (%) 32.0 34.7 36.1 37.6Capital turnover (x) 0.8 0.9 0.9 1.0
Source: Daiwa estimates
Scinopharm: one-year forward PER Scinopharm: QFII holding
Source: TEJ, Daiwa forecasts Source: TEJ
0
500
1,000
1,500
2,000
0%
5%
10%
15%
20%
25%
30%
35%
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
(TWDm)
Phase 1 NPV of FCF (RHS) Phase 2 NPV of FCF (RHS)Phase 3 NPV of FCF (RHS) Total Business ROICGrowth Business ROIC Remaining Business ROIC
20
40
60
80
100
Nov11 Feb12 May12 Aug12 Nov12 Feb13 May13 Aug13
(TWD)
20x 25x 30x 35x 1789 Scinopharm 0
2
4
6
8
10
12
14
Oct10 Apr11 Oct11 Apr12 Oct12 Apr13
(% )
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Scinopharm: peer valuations
Target
Share price Mkt cap Turnover PER (x) PBR (x) EPS (YOY %) ROE (%) Dividend yield (%)
Company Name Ticker Rating Price (LC) (USDm) (USDm) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E
Taiwan-listed companies Scinopharm 1789 TT Outperform 90.0 83.8 1,893 6 38.8 39.6 32.3 5.0 5.7 5.2 19 18 23 13 15 17 1 1.4 1.7TTY Biopharm 4105 TT Buy 120.0 99.7 777 4 44.3 25.8 16.3 6.8 5.0 3.8 4 47 58 17 22 27 1 1 1Formosa Labs 4746 TT NR NR 56.5 150 1 705.7 434.6 n.a. 2.0 n.a. n.a. -98 86 n.a. 0 n.a. n.a. 0 n.a. n.a.Global-listed companies Forest Labs FRX US NR NR 42.5 11,417 62 9.3 113.7 44.3 1.6 2.1 2.0 -1 -90 156 17 2 5 0 0 0.0Vivus inc VVUS US NR NR 12.5 1,264 30 n.a. -6.6 -11.3 6.1 41.8 n.a. 158 34 -42 -64 -634 89 0 n.a. n.a.Celltrion 068270 KS NR NR 45,100.0 4,083 115 25.9 14.0 12.2 4.3 3.6 3.4 20 60 15 17 26 28 0 0 0.0Divi's Labs DIVI IN NR NR 994.3 1,981 3 19.1 20.2 18.5 4.8 4.5 3.7 24 22 9 25 25 24 1 1 0.0Dr. Reddy'S Labs DRRD IN NR NR 2,292.9 5,851 13 23.0 24.7 21.4 6.0 4.5 3.7 30 21 15 26 23 21 1 1 0.0Cipla CIPLA IN NR NR 417.0 5,025 10 21.4 21.8 21.0 3.2 3.2 2.8 16 34 4 15 17 15 0 1 0.0Jiangsu Hengrui 600276 CH NR NR 32.0 7,115 41 34.5 34.4 26.2 7.1 6.7 5.5 23 18 31 21 19 21 0 0 0.0Zhejiang Hisun 600267 CH NR NR 15.8 2,169 29 41.4 42.4 31.2 2.7 2.5 2.3 -41 4 36 6 6 7 1 1 0.0Guangzhou Baiyanshan Pharma 600332 CH NR NR 33.3 6,649 512 22.7 46.8 32.7 2.2 6.0 5.0 37 46 43 10 13 15 0 0 0.0Tasly Pharm 600535 CH NR NR 42.5 7,171 296 37.1 39.5 31.1 7.1 7.6 6.1 26 44 27 19 19 20 0 1 0.0Jiangsu Nhwa Pharm 002262 CH NR NR 25.3 1,355 36 45.6 44.6 33.7 9.4 9.5 7.5 32 33 32 21 21 22 0 0 0National Jinghua Pharm 002349 CH NR NR 11.3 368 24 38.6 36.3 31.3 3.0 n.a. n.a. 2 26 16 8 n.a. n.a. 0 n.a. n.a.
Source: Bloomberg, Daiwa forecasts for rated companies
Note: prices are as of the close on 30 August 2013
Our comparison of peer valuations shows that Scinopharm is trading currently at premium to its India peers on 2014E PER and PBR, but largely inline with its China peers. Based on our forecasts, Scinopharm’s YoY EPS growth over 2014 will be higher than those of its India peers but lower than those of its China peers. Despite its lower earnings growth for 2014E compared with its China peers, its ROE of 17% for 2014E is higher than Zhejiang’s 7% and slightly lower than Jiangsu’s 21% (both based on Bloomberg forecasts). Given the strong cancer-drug pipeline that we see for Scinopharm over 2013-14, and the start of its injectables contract-manufacturing business in 2017, in addition to its stronger balance sheet, we believe the stock deserves to trade at a premium to its China peers. In addition, it is worth noting that Scinopharm’s share price has outperformed those of its two biggest customers since July this year – Vivus, a US pharmaceutical company that develops therapies for obesity and diabetes, and Forest Laboratories, a US pharmaceutical company that specialises in late-stage drug development of anti-depressants. We believe Scinopharm’s share price has a high correlation with those of these two customers, and as long as these two stocks keep performing well, so should Scinopharm.
Scinopharm: share price performance vs. those of Vivus and Forest Lab
Source: Bloomberg
Risks to our recommendation
• A faster-than-expected decline in the price of generic API drugs globally due to intensifying competition from the players in India and China, which would result in lower-than-expected sales and earnings for Scinopharm.
• Lower-than-expected sales from its CRAM customers would result in fewer API drug shipments, and thus would negatively affect the company’s earnings growth.
• Delays in ramping up capacity at its new injectables manufacturing plant would mean we might see downside risks to our cash flow forecasts after 2015, which might lead us to reassess our target price for the company.
0
10
20
30
40
50
0
20
40
60
80
100
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
(USD)(TWD)
Scinopharm (LHS) Vivus (RHS) Forest Laboratories (RHS)
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Company background
Founded in 1997, Scinopharm specialises in the manufacture of cancer API drugs and now has the biggest revenue market share globally for the following APIs: doxetaxel, irrinotecan, galantamine, and paclitaxel. Scinopharm: top-selling API drugs
API Brand name Indication Sept 2011 market share
Cancer API Docetaxel Taxotere Breast/lung/prostate/stomach cancer 51% worldwide Irinotecan HCI Camptosar Colon cancer 40% worldwide Paclitaxel Taxol Breast/lung/ovarian cancer 20% worldwide Gemcitabine HCI Gemzar Pancreas/lung/breast cancer 30% Europe CNS API Galantamine Reminyl Alzheimer's 49% worldwide
Source: Company
In addition to manufacturing API drugs, the company offers CRAM services to international top-tier pharmaceutical companies. This business accounted for 28% of total revenue for 2012. Scinopharm’s founders worked previously for Syntex Pharmaceutical, which was sold to Roche in 2004. The company’s founder, CEO and president, Jo Shen, has more than 35 years of management experience in the chemicals and pharmaceuticals businesses. At Syntex Pharmaceutical, Dr. Shen served as a vice-president for pharmaceutical technology and operations, and prior to that she was an electronic material plant manager in Monsanto. Scinopharm: top shareholders Top shareholders Ownership (%) Uni-President Enterprises Corp 37.94Development Fund of the Executive Yuan 13.85Taiwan Sugar Corp. 4.12President International Development Corporation 3.63Tung Yu Investment 3.09Prince Housing & Development Corp 2.99Tainan Spinning Co Ltd 2.99Kai Yu Investment Company Limited 1.87Kao Chuan Investment Company, Ltd. 1.86Kai Nan Investment Corporation 1.76BlackRock Institutional Trust Company, N.A. 1.03
Source: Thomson One
China market In 2009, Scinopharm started to build a manufacturing facility in Changsu in Jiangsu Province. The first phase of the plant was completed in 1Q12 and the second phase is due to be completed in 4Q13. The facility is designed in line with cGMP standards (a production and testing practice that helps to ensure a quality product) and will be used to produce intermediates (molecular entities) and high-potency APIs. The company recently formed an alliance with Taiwan-based pharmaceutical company Coland Holdings to develop a series of generic cancer drugs for the China market. According to Scinopharm, the market value of such API products was about USD800m for 2012.
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Daiwa’s Asia Pacific Research Directory
Daiwa’s Asia Pacific Research Directory
HONG KONG
Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head
John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management
Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion
Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)
Hui MIAO (852) 2848 4464 [email protected] Macro Economics (China)
Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)
Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)
Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)
Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)
Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China)
Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China)
Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)
Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)
Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)
Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)
Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)
John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Multi-Industries (Hong Kong, China); Internet (China)
Joey CHEN (852) 2848 4483 [email protected] Steel (China)
Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)
Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group
Thomas HO (852) 2773 8716 [email protected] Custom Products Group
PHILIPPINES
Rommel RODRIGO (63) 2 813 7344 ext 302
Head of Philippines Research; Strategy; Capital Goods; Materials
SOUTH KOREA
Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy
Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel
Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals
Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance
Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)
Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail
Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)
Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)
Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game
SoYoung WANG (82) 2 787 9133 [email protected] Transportation/Logistics
TAIWAN
Mark CHANG (886) 2 8758 6245 [email protected] Head of Research
Steven TSENG (886) 2 8758 6252 [email protected]
IT/Technology Hardware (PC Hardware)
Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer
Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)
Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)
INDIA
Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance
Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components
Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities
Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer
Deepak PODDAR (91) 22 6622 1016 [email protected]
Materials
Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities
SINGAPORE
Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)
David LUM (65) 6329 2102 [email protected] Property and REITs
Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)
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Daiwa’s Offices
Office / Branch / Affiliate Address Tel Fax
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HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661
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Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office
Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China
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Disclaimer
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Taiwan Healthcare Sector 2 September 2013
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