(185750 KS) Obesity drug beloranib to draw increasing attention Healthcare Company Update July 15, 2014 (Maintain) Buy Target Price (12M, W) 101,000 Share Price (07/14/14, W) 69,500 Expected Return 45% OP (14F, Wbn) 71 Consensus OP (14F, Wbn) 71 EPS Growth (14F, %) 78.9 Market EPS Growth (14F, %) 17.6 P/E (14F, x) 12.9 Market P/E (14F, x) 11.6 KOSPI 1,993.88 Market Cap (Wbn) 654 Shares Outstanding (mn) 9 Free Float (%) 72.1 Foreign Ownership (%) 10.7 Beta (12M) -0.39 52-Week Low 64,300 52-Week High 79,200 (%) 1M 6M 12M Absolute -5.4-7.0 0.0 Relative -5.6-9.2 0.0 120 110 100 90 Daewoo Securities Co., Ltd. [Healthcare] 80 12.13 4.14 Hyun-tae Kim +822-768-3251 hyuntae.kim@dwsec.com KOSPI Asia NDR feedback: New drug beloranib attracts keen interest We accompanied on a non-deal road (NDR) show from July 7th to the 11th to meet with around 20 institutional investors in Hong Kong and Singapore. Key issues of interest were 1) Korea s drug pricing regulations, 2) s mid/long-term growth strategy, 3) progress in the development of the obesity treatment beloranib and the recent IPO of Zafgen, the company s US partner for the drug, and 4) other new drugs in the pipeline. In particular, investors expressed keen interest in the company s plans for the development of beloranib. Zafgen went public on Nasdaq in June and currently has a market value of US$400mn. We believe Zafgen s market value is almost entirely based on the perceived value of beloranib, given that the company has no operating income streams as of yet and that the obesity drug (exclusively licensed from ) is the only drug in Zafgen s pipeline that has advanced to the clinical trial stage. Profit to improve full swing in 2H We forecast s 2Q non-consolidated revenue and operating profit to come in at W136.4bn (+1.7% YoY) and W18.1bn (+3.5% YoY), respectively. Top-line growth was likely due to a modest increase in domestic sales. We believe operating profit growth was limited to the single digits, affected by 1) marketing expenses for the new diabetes treatment Duvie as well as several OTC drugs, and 2) fewer business days in the quarter. Heading into 2H, however, we expect margins to improve more meaningfully, boosted by 1) the growth of existing products, and 2) the receipt of a milestone payment for beloranib. Looking further into 2015, we expect Duvie to be increasingly prescribed at large hospitals, sustaining the improvements in product mix and profit margins. Value of beloranib to draw increasing attention We reiterate our Buy rating and target price of W101,000 on. We anticipate profitability to improve, backed by increasing sales of several in-housedeveloped, incrementally modified drugs (IMD), as well as the in-house-developed Duvie. The medium- and long-term profit outlook also appears bright, supported by the company s robust IMD pipeline. We believe progress in beloranib clinical trials in the US and Australia could set the stage for a valuation re-rating. The company s US partner Zafgen has raised enough proceeds from its IPO to finance the clinical trials. As such, Zafgen is expected to conduct a Phase 2b clinical trial on severe obesity in Australia and a Phase 3 trial on Prader-Willi Syndrome in the US in 2H. Progress in these clinical trials should boost the drug s potential value, which in turn should drive up s enterprise value. FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Revenue (Wbn) 442 461 86 559 605 634 OP (Wbn) 69 58 8 71 83 89 OP margin (%) 15.6 12.6 9.3 12.7 13.7 14.0 NP (Wbn) 49 26 4 51 61 66 EPS (W) 0 0 3,006 5,377 6,442 7,019 ROE (%) 15.0 7.3 1.3 15.7 16.2 15.2 P/E (x) - - 22.7 12.9 10.8 9.9 P/B (x) - - 2.1 1.9 1.6 1.4 Notes: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Table 1. s s IMD and new drug pipeline Classification Phase I Phase II Phase III New drugs CKD-581 (Lymphoma) CKD-732 (Severe obesity) CKD-11101 CKD-519 (Dyslipidemia) CKD-516 (Solid cancer) (2 nd generation EPO, anemia) Incrementally Modified Drugs (IMD) Licensed-in new drugs CKD-12101 (Neutropenia) CKD-12201 (HPV vaccine) CKD-905 (Pain) CKD-330 (Hypertension) CKD-904 (Prostatism) CKD-337 (Dyslipidemia) CKD-346 (Combination of hypertension + dyslipidemia) CKD-906 (Dyslipidemia) Approval & commercialization Total Duvie (Diabetes) 8 Dilatrend SR (Hypertension) CKD-942 (Idiopathic pulmonary fibrosis) 2 CKD-943 (Pain, uremic pruritus) Total 4 6 5 2 17 Source: Company data, Table 2. R&D pipeline schedule: Major IMDs and new drugs scheduled to launch in 2016-2017 Classification New Drugs Bio IMDs Adopted Drugs CKD-501 (Duvie) CKD-732 Disease Diabetes Severe obesity Prader-Willi syndrome 1Q 2Q 3Q 2014 2015 2016 2017 P2 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q P2,3 CKD-516 Solid cancer P2 CKD-581 Lymphoma P2 CKD-519 Dyslipidemia P1 P2 CKD-11101 Anemia CKD-12101 Neutropenia P1 CKD-12201 HPV vaccine P2 Dilatrend SR Hypertension CKD-904 Prostatism CKD-337 Dyslipidemia CKD-342 Allergic rhinitis CKD-906 Dyslipidemia CKD-346 Mixed hypertension +dyslipidemia CKD-905 Pain CKD-330 Hypertension CKD-943 CKD-942 Pain, uremic pruritus Idiopathic pulmonary fibrosis Notes: Pipeline schedule may change depending on company circumstances Source: Company data, 2Q Appro val 3Q 7 4Q 2
Figure 1. Beloranib is the only drug in Zafgen s pipeline that has advanced to the clinical trial stage Source: Zafgen, Figure 2. Weight loss mechanism of beloranib Source: Zafgen, Figure 3. Weight loss effects seen in clinical phase 2a trial of beloranib in Australia Figure 4. Body fat reduction results seen in clinical phase 2a trial of beloranib in the U.S. Notes: Subcutaneous injection once every two weeks for 12 weeks for severe obesity Source: Company data, Notes: Subcutaneous injection once every two weeks for 8 weeks for Prader-Willi syndrome Source: Company data, 3
Figure 5. Zafgen s s market cap & 12M forward P/E: Market cap was $408 million as of 7/14 (US$mn) 440 Market cap (L) 12M forward P/E (R) (x) 1 430 0.8 420 0.6 410 0.4 400 0.2 390 6/19 6/24 6/29 7/04 7/09 7/14 0 Source Bloomberg, Table 3. Quarterly and annual earnings forecasts (Wbn, %, W) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F 4Q14F 2013 2014F 2015F Revenue 117.9 134.1 126.5 86.3 138.7 136.4 136.8 147.4 464.8 559.3 605.1 YoY 13.2 12.2 7.5-28.0 17.6 1.7 8.2 70.8 0.8 20.3 8.2 Domestic 113.8 120.8 118.3 75.6 131.6 122.9 125.1 134.6 428.4 514.1 550.4 Exports 4.1 13.3 8.2 10.8 7.1 11.8 9.8 10.5 36.3 39.2 42.7 OP 15.1 17.4 18.3 7.5 15.2 18.1 20.6 17.5 58.4 71.4 83.3 OP margin 12.8 13.0 14.5 8.7 11.0 13.2 15.1 11.8 12.6 12.8 13.8 YoY 40.3 9.5 4.5-47.1 0.9 3.5 12.6 131.5-0.1 22.2 16.7 Pretax profit 13.9 17.1 16.9 6.0 14.2 17.4 20.0 17.2 53.9 68.8 82.4 YoY 52.3 3.4 0.3-54.4 2.4 1.7 18.5 186.1-3.2 27.7 19.8 Net profit 10.0 12.1 11.6 4.4 10.8 12.8 14.7 12.3 38.1 50.6 60.6 YoY 43.0 7.9 TTB -54.7 8.3 5.8 26.8 177.5 48.3 32.7 19.8 EPS 3,006 5,377 6,442 YoY 78.9 19.8 Notes: 2013 earnings are pre-spin-off, but 2013 EPS is post-spin-off Source: Company data, Figure 6. 12M forward P/E band Figure 7. 12M forward P/B band (W) 80,000 14.0x 13.4x 12.7x (W) 80,000 2.1x 2.0x 1.9x 75,000 12.1x 75,000 1.8x 11.4x 1.7x 70,000 70,000 65,000 12/13 3/14 6/14 9/14 12/14 65,000 12/13 3/14 6/14 9/14 12/14 Source: Source: 4
(185750 KS/Buy/TP: W101,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F Revenue 86 559 605 634 Current Assets 255 276 334 396 Cost of Sales 40 253 265 278 Cash and Cash Equivalents 13 10 48 97 Gross Profit 46 306 340 356 AR & Other Receivables 160 189 205 214 SG&A Expenses 39 235 257 268 Inventories 71 66 71 74 Operating Profit (Adj) 8 71 83 89 Other Current Assets 11 11 10 11 Operating Profit 8 71 83 89 Non-Current Assets 267 271 276 280 Non-Operating Profit -2-2 -1 1 Investments in Associates 0 0 0 0 Net Financial Income -1-5 -4-2 Property, Plant and Equipment 215 220 225 229 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 18 17 17 17 Pretax Profit 6 69 82 90 Total Assets 522 547 610 676 Income Tax 2 18 22 24 Current Liabilities 131 108 113 116 Profit from Continuing Operations 4 51 61 66 AP & Other Payables 48 62 67 70 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 64 27 27 27 Net Profit 4 51 61 66 Other Current Liabilities 19 19 19 19 Controlling Interests 4 51 61 66 Non-Current Liabilities 93 93 93 93 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 61 61 61 61 Total Comprehensive Profit 4 50 61 66 Other Non-Current Liabilities 32 32 32 32 Controlling Interests 4 50 61 66 Total Liabilities 224 201 206 209 Non-Controlling Interests 0 0 0 0 Controlling Interests 298 346 404 467 EBITDA 11 75 87 92 Capital Stock 24 24 24 24 FCF (Free Cash Flow) 8 37 41 53 Capital Surplus 271 271 271 271 EBITDA Margin (%) 12.8 13.4 14.4 14.5 Retained Earnings 3 51 109 172 Operating Profit Margin (%) 9.3 12.7 13.7 14.0 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 4.7 9.1 10.1 10.4 Stockholders' Equity 298 346 404 467 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F 12/13 12/14F 12/15F 12/16F Cash Flows from Op Activities 10 45 49 61 P/E (x) 22.7 12.9 10.8 9.9 Net Profit 4 51 61 66 P/CF (x) 9.6 8.4 7.2 6.8 Non-Cash Income and Expense 6 28 30 30 P/B (x) 2.1 1.9 1.6 1.4 Depreciation 3 3 3 3 EV/EBITDA (x) 69.3 9.7 8.0 6.9 Amortization 0 0 0 0 EPS (W) 3,006 5,377 6,442 7,019 Others 3 25 27 27 CFPS (W) 7,122 8,319 9,629 10,249 Chg in Working Capital 0-9 -16-10 BPS (W) 31,726 36,787 42,930 49,649 Chg in AR & Other Receivables -7-19 -14-9 DPS (W) 300 300 300 300 Chg in Inventories 4 6-5 -3 Payout ratio (%) 63.9 5.6 4.7 4.3 Chg in AP & Other Payables 1 6 3 2 Dividend Yield (%) 0.4 0.4 0.4 0.4 Income Tax Paid 0-18 -22-24 Revenue Growth (%) -81.3 550.0 8.2 4.8 Cash Flows from Inv Activities -2-9 -9-9 EBITDA Growth (%) -84.5 581.8 16.0 5.7 Chg in PP&E -2-8 -8-8 Operating Profit Growth (%) -86.2 787.5 16.9 7.2 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - 78.9 19.8 9.0 Chg in Financial Assets 44 0 0 0 Accounts Receivable Turnover (x) 0.6 3.5 3.4 3.4 Others -44-1 -1-1 Inventory Turnover (x) 1.3 8.2 8.9 8.7 Cash Flows from Fin Activities 0-39 -3-3 Accounts Payable Turnover (x) 1.1 6.7 6.3 6.2 Chg in Financial Liabilities -2-37 0 0 ROA (%) 0.8 9.5 10.5 10.3 Chg in Equity 223 0 0 0 ROE (%) 1.3 15.7 16.2 15.2 Dividends Paid 0-3 -3-3 ROIC (%) 1.4 12.5 14.0 14.4 Others -221 1 0 0 Liability to Equity Ratio (%) 75.1 58.2 51.1 44.9 Increase (Decrease) in Cash 7-3 38 49 Current Ratio (%) 195.1 254.9 295.0 340.1 Beginning Balance 6 13 10 48 Net Debt to Equity Ratio (%) 36.3 21.6 9.2-2.5 Ending Balance 13 10 48 97 Interest Coverage Ratio (x) 7.9 12.2 17.2 18.4 Source: Company data, estimates 5
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (185750) 03/12/2014 Buy 101,000 (W) 120,000 100,000 80,000 60,000 40,000 20,000 0 Jul 12 Jul 13 Jul 14 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. 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