Shenzhen Salubris Pharmaceuticals:Stable growth ahead for Talcom,big potential for second-line drugs

Stable growth ahead for Talcom, which is likely to re-enter Guangdong.

    Salubris' Talcom and Sanofi's Plavix are about to start competing in the same biddingtier (tier 3) within Guangdong province as a result of new interim rules that take effectin January. Therefore, if Salubris is the only successful bidder in this tier, it will shareGuangdong's nearly Rmb800m clopidogrel market with just one rival, Lepu Medical.

    Talcom's stable growth is also supported by increasing percutaneous coronaryinterventions (PCI) and applications in neurology and preventive treatment. Given theuncertain timing of Talcom's return to Guangdong, however, we are cutting our2016/17/18E EPS and terminal ROIC.

    Second-line drugs have significant potential.

    Of the company's second-line drugs, Taijianing (bivalirudin), a class 3.1 drug, is quicklyramping up, while Xinlitan (allisartan isoproxil), a class 1.1 hypertension drug, is now inthe tendering & promotion stage and undergoing preparations to enter the nationalmedical insurance reimbursement list. Both products are likely to become new profitgrowth drivers.

    Increased R&D investment and stronger pipeline.

    Salubris has developed innovative short-, mid- and long-term product pipelines throughacquisitions and internal R&D. On the one hand, multiple new biopharmaceutical drugsare on course to launch in the next two-to-three years. In H216, Salubris plans to applyfor production approval for recombinant human parathyroid hormone 1-34 (rhPTH1-34) lyophilized powder, and it has completed phase II trial enrolment for recombinanthuman keratinocyte growth factor (rhKGF). Meanwhile, medical device products underR&D include a left atrial appendage closure device and delayed vena cava filter. Thesenew products are poised to underpin the company's growth over the long term.

    Valuation: Trimming price target to Rmb40.66; maintain Buy rating.

    Considering the uncertain timing of Talcom's return to Guangdong, we are loweringour 2016/17/18E EPS by 2% in each year to Rmb1.42/1.71/2.04, and lowering terminalROIC to 8.2% from 9%. Our Rmb40.66 price target is based on DCF (WACC 6.8%)and implies 29x/24x 2016/17E PE. We maintain our Buy rating.