Jiangsu Hengrui Medicine:Novel drugs and internationalization to alleviate slowdown risks
Results growth underpinned by novel drugs and internationalization.
We are positive on the boost to the company's results from novel drugs andpreparations exports. Benefiting from innovation, product mix optimisation andpreparations exports, Hengrui's earnings growth has been notably faster than theindustry average (c10%). We estimate its revenue will increase 26%/18%/15% in2016-18 with gross profit growing at a CAGR of 16%.
Anti-tumour drug revenue growth driven by novel drugs and exports.
We believe China's anti-tumour drug market structure will be more aligned with globalmarket, with increasing novel drug sales. Sales of oxaliplatin (anti-tumour), docetaxeland irinotecan have increased steadily. Apatinib (a novel drug) has a good treatmenteffect, and we expect quick revenue growth given its visible treatment effect onChinese gastric cancer patients and the likely shift to higher tier status. The company'sdistribution partner for cyclophosphamide in the US is Sandoz and we expect its marketshare will expand further. We estimate its anti-tumour drug revenue growth at29%/16%/13% in 2016-18 with gross profit growing at a CAGR of 14%.
Anaesthetic drugs benefited from tiered quality tendering system.
Hengrui has leveraged its advantages in tiered quality tendering system to strengthenpromotion of its anaesthetic drugs and has achieved good results for its flagshipproducts. We estimate its anaesthetic drug revenue will increase 17%/13%/11% in2016-18 with gross profit growing at a CAGR of 12%.
Valuation: Maintain PT of Rmb57.75 and Buy rating.
We are raising our 2016-18E EPS by 7%/6%/6% because we are optimistic onHengrui's novel drug sales and exports. In addition, we are cutting our reinvestmentrate to 29% from 50% and second stage ROIC to 20% from 30%, while raising ourterminal growth assumption to 4.5% from 2.5%. We derive our PT of Rmb57.75 basedon DCF model (WACC=5.8%), implying 47x 2016E PE.