Sector Note July 14, 211 Overweight Company Rating TP (KRW) Green Cross BUY 215, Yuhan BUY 218, LG Life Sciences Hold 55, Daewoong Pharm. BUY 55, Hanmi Pharm Hold 98, Dong-A Pharm. BUY 151, Pharmaceuticals & Biotech. 2Q11F preview: Turnaround still slow but 2H11 outlook remains upbeat 2Q11 preview: Maintain Overweight as turnaround expected in 2H11; Green Cross is top pick Top six players in the KIS Universe pharmaceuticals sector should see sales stay flat (+.5% YoY) and OP lose 12.5% YoY in 2Q11F. Sales will be in line with the forecast but OP is set to miss our expectation and the consensus by 24%. Disappointing OP is attributed to: 1) drug price cuts following the government's incentives to hospitals for the purchase of low-priced drugs, and 2) heavier-thanexpected margin pressure from growing R&D investment. But sales and OP should increase 5.7% and 9.6%, respectively, from a quarter ago, supporting our hopes for a turnaround in 2H11. We reiterate Overweight on the sector. Our top pick is Green Cross, whose earnings and overseas momentum stands out among peers. Our TP is W215,, equal to 211F PE 23x. We also favor Dong-A Pharm on momentum from its new drug pipeline. Jung-In Lee 822-3276-6239 jilee@truefriend.com Green Cross sees healthy sales growth while Hanmi continues to lose ground Following 1Q11, Green Cross sales growth topped the peers by jumping 15.4% YoY while Hanmi Pharm shed 13.4% YoY in 2Q11. Daewoong Pharm and Yuhan Corp. should increase 4.2% YoY and 2.5% YoY, respectively, as new products make up for sliding sales of existing products. But the operating accounts were sluggish overall. Although much anticipated, Green Cross OP should drop 6.9% YoY to W2bn, missing our forecast and the consensus by 13% and 36%, respectively. The lackluster operating results are due to: 1) slower-than-expected decline in the COGS for imported blood plasma after the acquisition of two blood centers, and 2) faster-than-expected progress of clinical trials abroad, resulting in a 11% YoY rise in R&D costs (with R&D costs-to-sales up 3.6%p YoY). Major subsidiaries: Yuhan Kimberly recovers from 1Q11 and Beijing Hanmi keeps prospering Sound earnings are expected at the subsidiaries Yuhan Kimberly and Beijing Hanmi. Putting an end to 1Q11 s sluggishness (sales up 3.7% YoY, OP down 27.5% YoY), Yuhan Kimberly should see sales and OP growth of 12.8% YoY and 22.8% YoY, respectively. By division, diaper sales should increase 6% YoY compared to -7.4% YoY in 1Q11, and sanitary napkins should grow 5% YoY on a 5.3% price increase. Beijing Hanmi should continue robust sales growth of 3% YoY in 2Q11 on full-fledged sales of 18 new products. Hopeful 2H11 turnaround: Higher outpatient prescription rate and more visible pipeline momentum Investor sentiment toward the pharmaceuticals sector is improving thanks to positive news such as deregulation to allow the sale of over-the-counter (OTC) drugs at supermarkets. If the top-tiers turn around and new drug pipeline momentum materializes in 2H11, the sector will have hit bottom and make an upturn (top-tiers sales growth -2.5% YoY in 1H vs. estimated 14.5% YoY in 2H). We are upbeat about the turnaround possibility considering: 1) more favorable operating environment for top-tiers in the wake of the introduction of dual-penalties j
for both rebate givers and takers, and 2) a spate of drug releases (generics in Jun and Yuhan s liver disease treatments worth W1bn in 4Q11). Our upbeat outlook is also bolstered by a steady improvement in the outpatient prescription rate (9.7% YoY in May and 5.8% YoY in Jun). Impressive overseas pipeline momentum in 2H11 is a boon for better sentiment among investors (Green Gross full-fledged flu vaccine exports to South America; Dong-A Pharm s completion of phase III clinical trials in the US for super-bacteria antibiotics; Hanmi Pharm s possible license-out of Labscovery, a sustained-release bio-manufacturing technology). 2Q11F earnings preview (W bn, %) KIS estimates Sales growth % OP growth % OP margin % % to Concensus % to old KIS estimates Sales OP QoQ YoY QoQ YoY Sales OP Sales OP Green Cross 185 2 18.7 15.4 24.2 (6.9) 1.8 3.6 (13.). (36.3) Dong-A 18 22 4.1 4.2 17.6 (29.1) 12.2 (1.6) (11.3) (2.7) (15.1) Daewoong 172 18 2.7 2.5 (23.) (29.4) 1.5 (2.3) (21.2) (2.8) (16.4) LG Life Sciences 224 25 6.3 1. (12.4) (14.1) 11. (4.) (15.4) (2.9) (17.4) Yuhan 86 2. (6.9) 39.5 (83.9) 2.2 (14.1) (69.5) (15.4) (53.) Hanmi 13 4 2.4 (13.4) 11.9 88.4 2.9 (11.1) (2.6) (1.) (3.5) Average 5.7.5 9.6 (12.5) 2.9 (4.9) (25.2) (4.1) (23.6) Note: Ascending order by company s Sales growth YoY Source: Company data, Korea Investment & Securities Top 1 companies market share 44 42 (%) 42.6 42.6 Top 1 41.8 Companies ranking 3th and lower Top-tier play ers regained some of its lost market shares since anti-rebate 4 39.6 38 36 37.2 35.8 37.2 36.3 37.8 37. 35.4 35.4 34 32 33.1 32.7 33.1 33.2 3 24 25 26 27 28 29 21 211YTD Source: UBIST, Korea Investment & Securities 2
Pharmaceuticals valuation gap compared to MSCI Korea narrowed down to close a six-year historical low 211 annual health insurance financial deficit seems to recover : relieve from regulation risk 15 1 (%) +1 SD -1 SD Average Valuation premium over MSCI Korea 2, 1,5 1, (W bn) 1,79 1,568 1,179 1,367 5 5 (5) (75) (285) (3) Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 (1,) (761) (882) -5 (1,5) (1,3) 22 23 24 25 26 27 28 29 21 211F Source: equant, Quantise, Company data, Korea Investment & Securities Note: Accumulated financial surplus of 971 billion Won in 211 May is due to company medical insurance payout Source: National Health Insurance Corporation, Ministry of Health & Welfare, Korea Investment & Securities Exports and overseas new drug pipeline developments Green Cross Yuhan Dong-A LG LS Hanmi Daewoong 1Q 2Q 3Q 4Q Flu vaccine clinical data Flu vaccine clinical trial results to be 1) Overseas blood 1) Flu vaccine exports submission to WHO PQ approved by WHO PQ derivatives M&A possibility to South America s PAHO 2) Green Gene-F 2) IVIG exports to (hemophilia) clinical trials to be Southeast Asia completed in China 1) Revanex exports to India 2) Liver disease medicine product introduced Zydena phase III clinical trial completion in US Domestic approval of new phyto-medicine(motilitone) 1) Labscovery Europe phase Submit application for II_a clinical trial completion Amosartan market release in Europe 2) Astra Zeneca lawsuit regarding Esomezol Source: Company data, Korea Investment & Securities Neuropathic pain-reliever enters phase II clinical trial 1) Zydena export to Brazil CT contrast medium release (August) 1) New phyto-medicine (Motilitone) release 2) KFDA approval of Medipost(Stem Cell Therapy) 3) Super Bacteria phase III clinical trial completion in US 1) SRH(infant) phase III clinical trial completion in US 2) DPP-4(diabetes) license-out possibility Labscovery license-out possibility 3
Peer valuation (W bn, %) Yuhan Hanmi Dong-A Greencross LG LS Daewoong Average Rating Buy Hold Buy Buy Hold Buy Share price(krw, 7/13) 14, 76,2 9,8 163,5 46,85 41,4 Target Price(KRW) 218, 98, 151, 215, 55, 55, Upside(%) 56 29 66 31 17 33 MKT cap(krw bn) 1,684 613 1,191 1,256 774 45 PER 29A 13. (58.1) 15.7 1.8 48.4 23.9 22.3 21F 1.4 14.4 13. 17.1 34.5 6.7 16. 211F 8.5 1. 11.1 14. 27. 6.4 12.8 PBR 29A 1.5 2.6 1.6 2.3 3.6 1.3 2.2 21F 1.4 2. 1.3 2.8 4.6 2.1 2.4 211F 1.2 1.7 1.2 2.4 5.2 2.1 2.3 Sales growth(% YoY) 29A 3. (3.5) 5.7 23. 9.6 (6.9) 5.2 21F 12.2 1.4 11.5 *(4.3) (.) 7.1 8.2 211F 16.4 12.5 5.7 15.5 23.7 7.2 13.5 EPS growth(% YoY) 29A 1.8 NM 1.8 25.8 7.7 (48.3) (2.3) 21F 15.9 NM 3.1 *(15.6) 25.9 *247.7 55.4 211F 22.5 44.2 17.5 22.1 27.9 5.3 23.2 OPM (%) 29A 12. (2.2) 11.6 18.4 4.8 14. 1.6 21F 12.9 5.1 13.1 16.1 7.9 14.8 11.6 211F 14. 7. 12.5 16.8 6.5 15.1 12. NPM (%) 29A 19.7 NM 8.6 13.2 4.9 3.4 1. 21F 2.1 6.1 9.8 12.4 5.9 11.1 1.9 211F 21.4 7.8 9.3 13.1 6.3 11.2 11.5 ROE (%) 29A 13. 12.1 1.4 16.6 8.1 23.9 14. 21F 14.6 14.5 11.6 17.9 11.5 35.3 17.6 211F 14.3 16.9 12.5 18.6 15.5 32. 18.3 ROA (%) 29A 11.3 5.6 6.5 12.5 4.2 11.3 8.6 21F 12.7 7.4 7.5 14. 4.8 11.2 9.6 211F 12.4 1.7 8.4 14.7 5.7 9.7 1.3 Note: 1. Greencross: Excluding influenza sales effect, 211 sales growth(2.8% YoY), EPS growth(15.7% YoY) 2. Daewoong: 211 EPS growth of 247.7% YoY is caused by a base effect of 28.4billion Won extra tax collection Source: Korea Investment & Securities 4
Changes to recommendation and price target Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target Yuhan (1) 7-28-9 BUY W24, 6-22-11 BUY W215, 1-27-11 BUY W218, LG Life Sciences 9-25-9 NM W Dong-A Pharm. 1-23-9 BUY W135, (6887) 9-29-9 BUY W88, (64) 3-16-1 BUY W145, 1-27-1 BUY W85, 9-2-1 BUY W16, 4-21-1 Hold W55, 12-14-1 BUY W151, Daewoong Pharmaceutical 9-1-9 Hold W65, Green Cross (628) 8-17-9 BUY W165, (6962) 2-18-11 BUY W55, 8-28-9 BUY W25, Hanmi Pharm 8-17-1 Hold W114, 12-17-1 BUY W19, (12894) 1-21-1 Hold W132, 1-28-11 BUY W184, 1-21-11 Hold W98, 4-4-11 BUY W193, Yuhan(1) Dong-A Pharm.(64) 3, 25, 2, 15, 1, 5, Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 18, 16, 14, 12, 1, 8, 6, 4, 2, Green Cross(628) LG Life Sciences(6887) 25, 2, 15, 1, 5, 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Daewoong Pharmaceutical(6962) Hanmi Pharm(12894) Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 8, 7, 6, 5, 4, 3, 2, 1, Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 14, 12, 1, 8, 6, 4, 2, 5
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Yuhan. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Yuhan in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Yuhan in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Yuhan in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Yuhan s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Yuhan,Dong-A Pharm.,Green Cross,LG Life Sciences,Daewoong Pharmaceutical,Hanmi Pharm shares as of July 15, 211. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of July 15, 211. Prepared by: Jung-In Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 6