Dong-A Pharmaceutical ( KS)

Transcription

1 Dong-A Pharmaceutical (64 KS) Trading Buy (Initiate) Target Price (12M, W) 115, Share Price (9/3/12, W) 94,6 Expected Return (%) 21.6 EPS Growth (12F, %) -3.7 Market EPS Growth (12F, %) 12.7 P/E (12F, x) 22. Market P/E (12F, x) 1.2 KOSPI 1, Market Cap 1,53 Shares Outstanding (mn) 11 Avg Trading Volume (6D, ') 29 Avg Trading Value (6D, Wbn) 3 Dividend Yield (12F, %) 1.1 Free Float (%) Week Low (W) 68,6 52-Week High (W) 12, Beta (12M, Daily Rate of Return).27 Price Return Volatility (12M Daily, %, SD) 1.8 Foreign Ownership (%) 25.3 Major Shareholder(s) Kang Shin-ho et al. (28.29%) National Pension Service (9.29%) Hanmi Holdings et al. (8.71%) Price Performance (%) 1M 6M 12M Absolute Relative Strong market presence and robust Bacchus sales Top-line growth to be slow due to price cuts; Bacchus to post robust sales in 2H Expect positive R&D results in 2H (DA-7218) Initiate coverage with Trading Buy and TP of W115, We initiate our coverage of Dong-A Pharmaceutical with a Trading Buy rating and a 12-month target price of W115,. In deriving our target price, we applied a P/E of 17.7x (the domestic peer group average) to the average of our 212 and 213 EPS projections for the company and added a premium to reflect the companyês overseas growth potential. Operating profit is likely to suffer temporarily due to sweeping drug price cuts, but it should recover steadily from 213 as the companyês operations normalize. Robust Bacchus sales to mitigate the impact of drug price cuts This year, ETC price cuts will likely dent Dong-AÊs revenues by roughly W8bn. Despite this, we expect Dong-AÊs revenues to grow by approximately W11bn, to W959.8bn (up 5.8% YoY; under non-consolidated K-IFRS), aided by robust Bacchus sales, export growth, and licensed-in product sales. Bacchus revenues have risen roughly 3% YoY since supermarkets started to carry the brand (previously, it was only sold in drug stores). One step back, three steps forward Dong-A should see its financial position weaken this year. Still, we believe that it will manage to maintain its large market share due to the fact that industry-wide contraction should affect all of its peers. Our investment recommendation is premised on the following factors: 1) Dong-A holds the largest market share in Korea and is seeing stable revenue growth. 2) We expect the company to see positive R&D results for its pipeline and newlylaunched drugs, including Motilitone (a gastrointestinal treatment rolled out last year) and DA-971 (a super bacteria antibiotic in Phase 3 clinical trials). 3) An increase in Bacchus sales and new products should partially offset revenue declines caused by ETC price cuts. Share price 12 KOSPI /11 12/11 4/12 8/12 Earnings & Valuation Metrics FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (%) (Won) (%) (x) (x) (x) 12/ , / , /12F , /13F 1, , /14F 1, , Note: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates 92

2 1. Investment considerations Strong market presence and robust Bacchus sales Dong-A is the largest pharmaceutical company in Korea by revenue, with 19 blockbuster drugs on the market. We expect the company to deliver 212 revenues of W959.8bn, up 5.8% YoY. Revenues should be mostly generated in the domestic market due to slow overseas expansion. However, the companyês top line is continuing to grow despite unfavorable changes in the domestic business environment, thanks to healthy Bacchus sales. In addition to Dong-AÊs solid market presence in Korea, we believe that ongoing investments in biologics and possible European sub-licensing deals for DA-7218 are brightening the companyês outlook. Figure 9. PfizerÊs Zyvox market growth forecasts (US$mn) 1,8 1,5 1,2 Other Japan EU (5 major countries) US F 213F 214F Source: Datamonitor, Table 41. Major new drug R&D pipeline status Pipeline Indication Description Stage Drugs Natural substance drug DA-8159 DA-7218 Erectile dysfunction Benign prostatic hyperplasia Portal hypertension Pulmonary arterial hypertension Infection (ABSSSI) Lung infection Bacteremia PDE-5 inhibitor Oxazolidinone class antibiotic DA-1229 Type 2 diabetes DPP-4 inhibitor Phase II DA-634 Gastritis Phase III Flavone derivative Dry eye Phase II DA-831 Premature ejaculation SERT inhibitor Phase II DA-6886 Irritable bowel syndromeconstipation 5-HT4 Agonist Phase I DA-981 Diabetic neuropathy Herbal extracts Phase II DA-381 Infertility (Ovulation Induction) Recombinant FSH Phase III DA-331 Neutropenia PEGylated-G-CSF Phase III Biologics DA-32 Idiopathic short stature Human growth hormone Phase III DA-367 Brain tumor TRAIL Phase I Source: Dong-A Pharmaceutical, Phase III completed (US),Warner Chilcott Phase II planned (US), Warner Chilcott Phase II (EU), Dr.Falk Phase II Phase III (US), Trius Therapeutics Phase III planned (US), Trius Therapeutics Phase II planned (US), Trius Therapeutics 93

3 2. Strong R&D capabilities to boost Dong-AÊs revenues Bacchus revenues to jump at least 28% YoY in 2Q Dong-A continues to develop marketable products thanks to stable revenue growth. Last year, most top-tier firms failed to launch new drugs, but Dong-A introduced Motilitone, which, along with DA-7218, should help the company post steady growth going forward. DA-7218 is an orally administered super bacteria antibiotic currently in Phase 3 clinical trials in the US (under a licensing agreement with Trius Therapeutics, a US bio-venture). Scheduled to hit the market in 214 (clinical trials are slated to be completed in 2H12), the drug seems highly marketable, as it is more effective and easier to administer than PfizerÊs intravenously administrated Zyvox. BacchusÊ contribution to Dong-AÊs total revenues is rising, thanks to the fact that the government recently lifted a ban on the sale of Bacchus products in supermarkets. Indeed, revenues from Bacchus jumped at least 28% YoY in 2Q, to roughly W5bn. Until the aforementioned super bacteria antibiotic products are launched, OTC drugs and Bacchus are likely to remain the main sources of revenues. Still, early investments in biologics (ahead of peers) suggest that Dong-A is showing superior market responsiveness. Figure 91. 2Q Bacchus revenues grew by 3% YoY 6 Bacchus (D+F) Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Source: Dong-A Pharmaceutical, 94

4 3. Valuation We initiate our coverage of Dong-A Pharmaceutical with a Trading Buy call and a 12-month target price of W115,. In deriving our target price, we applied a P/E of 17.7x (the domestic peer group average) to the average of our 212 (W4,31) and 213 (W5,696) EPS projections for the company and added a premium to reflect the companyês overseas growth potential. This year, ETC price cuts will likely dent the companyês revenues by roughly W8bn. Despite this, top line should still grow by approximately W11bn, to W959.8bn, aided by robust Bacchus sales, export growth, and licensed-in product sales. Bacchus revenues have risen roughly 3% YoY since supermarkets started to carry the brand. Meanwhile, operating profit is forecast to shrink 26.1% YoY to W7.2bn, due to higher R&D costs and COGS. We believe that Dong-AÊs efforts to diversify its business portfolio (by expanding into biologics) will pay off in the future. Figure 92. Dong-A PharmaÊs revenues and operating profit forecasts 1,4 1,2 1, Revenues (L) Operating profit (L) OP margin (R) F 213F 214F (%) 16% 14% 12% 1% 8% 6% 4% 2% % Source: Dong-A Pharmaceutical, Table 42. Revenues and operating profits by business unit F 213F Revenues ,44.1 Drugs (ETC+OTC) Bacchus Export Other Operating profit Net profit Source: Dong-A Pharmaceutical, estimates 95

5 Dong-A Pharmaceutical (64 KS/Trading Buy/TP: W115,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Revenues ,35 1,1 Current Assets Cost of Sales Cash and Cash Equivalents Gross Profit AR & Other Receivables SG&A Expenses Inventories Operating Profit (Adj) Other Current Assets Operating Profit Non-Current Assets Non-Operating Profit Investments in Associates Net Financial Income Property, Plant and Equipment Net Gain from Inv in Associates Intangible Assets Pretax Profit Total Assets 1,237 1,323 1,394 1,494 Income Tax Current Liabilities Profit from Continuing Operations AP & Other Payables Profit from Discontinued Operations Short-Term Financial Liabilities Net Profit Other Current Liabilities Controlling Interests Non-Current Liabilities Non-Controlling Interests Long-Term Financial Liabilities Total Comprehensive Profit Other Non-Current Liabilities Controlling Interests Total Liabilities Non-Controlling Interests Controlling Interests EBITDA Capital Stock FCF (Free Cash Flow) Capital Surplus EBITDA Margin (%) Retained Earnings Operating Profit Margin (%) Non-Controlling Interests Net Profit Margin (%) Stockholders' Equity Cash Flows (Summarized) Forecasts/Valuations (Summarized) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities P/E (x) Net Profit P/CF (x) Non-Cash Income and Expense P/B (x) Depreciation EV/EBITDA (x) Amortization EPS (W) 5,446 4,31 5,696 8,425 Others CFPS (W) 7,755 5,413 6,8 9,499 Chg in Working Capital BPS (W) 61,18 62,938 67,368 74,54 Chg in AR & Other Receivables DPS (W) 1, 1, 1, 1, Chg in Inventories Payout ratio (%) Chg in AP & Other Payables Dividend Yield (%) Income Tax Paid Revenue Growth (%) Cash Flows from Inv Activities EBITDA Growth (%) Chg in PP&E Operating Profit Growth (%) Chg in Intangible Assets EPS Growth (%) Chg in Financial Assets Accounts Receivable Turnover (x) Others Inventory Turnover (x) Cash Flows from Fin Activities Accounts Payable Turnover (x) Chg in Financial Liabilities 3 51 ROA (%) Chg in Equity 9-17 ROE (%) Dividends Paid ROIC (%) Others Liability to Equity Ratio (%) Increase (Decrease) in Cash Current Ratio (%) Beginning Balance Net Debt to Equity Ratio (%) Ending Balance Interest Coverage Ratio (x) Source: Company data, estimates. 96