德意志银行中国医疗保健行业2Q17Earningspreviewexpectingstablegro

21July2017Pharmaceuticals/BiotechnologyChinaHealthcareHealthCarePharmaceuticals/BiotechnologyIndustryUpdateAsiaChinaHongKongIndustryChinaHealthcareDate21July2017DeutscheBankMarketsResearch2Q17Earningspreview:expectingstablegrowthExpectinghealthyresults;toppicksincludeHengrui,SBPandUniversalWeanticipatemostlargecapnamestodeliverin-lineresultswithstablegrowthfortheincomingearningsseason.Weforecast24%/17%/27%EPSgrowthforHengrui/SBP/CSPCin2Q17,and13%/17%forSinopharmandShanghaiPharma,respectively,in1H17.Asreforminitiativesaregeneratingimpactsontheentirevaluechain,webelieveitwouldbeinterestingtorevisitnamesthattakeone-timehit,includingPhoenix,Sinopharm,andCBPO/Hualan.WehighlightourtoppicksHengruiandSBPinviewofconsensus'under-appreciationforrespectivepipelines.Wealsohighlightkeynear-/mid-termcatalystsforHengrui,SBP,CSPCandCBPO.StablegrowthforflagshipproductsfromhighfrequencydataasofMay2017ForHengrui,AiBeiNing,AiSu,AiSiKang,andAiTanachieved27%,7%,10%and129%YoYgrowthinQTD2Q17,vs.40%,10%,11%,162%in1Q17and43%,1%,9%and162%in2016.ForSBP,Runzhong,Ganmei,KaifenandKaishiregistered3%,8%,22%,-10%YoYgrowthforQTD2Q17,vs.7%,1%,30%,-3%in1Q17and17%,0%,32%and-1%in2016.ForCSPC,NBPandOulainingrecorded31%,-16%YoYgrowthinQTD2Q17,vs.7%,1%,30%,-3%in1Q17and17%,0%,32%and-1%in2016.For3SBio,itsShenyangsubsidiaryachieved17%YoYgrowthin5M17vs.20%in2016,accordingtotheRxdatawetrack.FeedbackonimpactofreforminitiativesWehaveinterviewedstakeholdersalongthevaluechaininthepast2-3months.Webelievetheimplementationofatwo-invoicepolicyislikelytohaveamorepositiveimpactondistributionbellwethersvs.consensuswhilethenegativeimpactonindirectsalesmightbelessthanpreviousexpectations.Asformanufacturers,theimpacthasbeenlimitedsofar.InadditiontoaslightASPerosion,the15%mark-upremovalhasledtopatientvolumegrowthdecelerationintier1/2hospitals,whichalsodiffersfromourpreviousassumptioninMarch.However,thishasbeenlargelyreflectedinconsensusalreadyasnewsmediahasconstantlyreportedthosedatapoints.ValuationandrisksWegenerallyuseaP/Emultiple-basedvaluationapproachinlightofthesustainablegrowthweexpectfromthesector.Inthisreport,wehaveadjustedpricetargetsforCBPOandFDZJ,whichwesummarizeonpage10.Downsiderisksincludepriceerosionandreimbursementcontrol.Upsiderisksincludeaccelerationinnewproductlaunchesandfavorablegovernmentpolicy.JackHu,PhDResearchAnalyst+852-22036208LincYiuResearchAssociate+852-22036248KeyChangesCompanyTargetPriceRatingCBPO.OQ155.00to140.001349.HK7.70to6.70Source:DeutscheBankToppicksSinoBiopharmaceutical(1177.HK),HKD6.85BuyHengruiMedicine(600276.SS),CNY50.55BuyUniversalMedical(2666.HK),HKD6.16BuySource:DeutscheBankDeutscheBankAG/HongKongDeutscheBankdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.DISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)083/04/2017.Distributedon:20/07/201721:18:08GMT0bed7b6cf11c21July2017Pharmaceuticals/BiotechnologyChinaHealthcareNeartermstockcatalystsandDBviewHengruiKeypositivecatalystsincludemoreUSINDapprovalforitssixnovelcheckpointinhibitors,clinicalprogressofthePD1program,approvalofkeydrugsincludingnab-paclitaxel,19K,retagliptin,aswellastheramp-upofapatinibandSevoflurane.■Apotentialearlier-than-expectedsubmissionofmarketingapprovalpackageforpyrotinib,whichisbasedonphase2data,islikelytoprovideadditionalupside.However,wehavelowvisibilityonthispossibility.■Webelievestreetconsensushasunderestimatedopportunitiesandrisksassociatedwithnab-paclitaxelduetotheopaquedisclosurefromHengruiandCSPC.Inourview,ifeithercompanyweretoacquireCFDAapprovalasFTM,itishighlylikelytheotherplayerwouldhavetoconductaphase3studywhichwouldpostponeSTM(secondtomarket)genericlaunchby2-2.5years,unlessCFDAweretoapprovebothsimultaneously.■WebelievepotentialstockweaknessmightbedrivenbyP3datareleaseIncyte’sECHO-301,whichwillbethefirstreadofIDOinhibitors.RecallHengruisecuredUSFDAINDapprovalforitsownIDOinearlyMay.■WhileoperatingmarginexpansionislargelydrivenbyUSexports(90%OPMbyourestimates),wehighlightOPMondomesticbusinesshasstabilized,reversingtheOPMde-leveragetrendinthepast5-6years.Withmoreinnovativedruglaunches,wemodelaslightOPMexpansionin2018-2020.Figure1:OperatingandnetmarginsofHengrui,excludingexports0%5%10%15%20%25%30%1Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q17OPmargin(excl.exports)Netmargin(excl.exports)Source:DeutscheBank,CompanydataPage2DeutscheBankAG/HongKong21July2017Pharmaceuticals/BiotechnologyChinaHealthcareSinoBiopharmaKeycatalystsincludetenofovirandanlotinibapprovalswhichweexpectin4Q17andpipelineprogressonAdvairasSBPstartedphase3studyaheadofitsonlycompetitorHengrui.■Otherpositivecatalystsincludeclinicalprogressinitsbiologicspipeline,includingCFDAapprovalofitsINDonPD-L1,clinicalprogresswithitsbio-similarpipeline,aswellasUSclinicalprogressoftheongoingphase3studyofanlotinibinsarcomaintheUS.■Webelievethemostsoughtafterhighfrequencydatapointwouldbeth