Pharmaceuticals:Short of consensus as a group;Yuhan attracti
2Q preview: We now believe the combined 2Q results of the five largest pharmaceuticalfirms we cover will fall slightly short of consensus, with sales of KRW1.27t (up 3% y-y and shortof consensus by 1.3%), operating profit of KRW86.1b (up 16.7% y-y and below consensus by5.6%), and net profit of KRW83.3b (up 9.9% y-y and edging consensus by 1.9%). Despite therebeing fewer business days y-y due to an unusually long run of holidays in early May, sales likelyheld up well industry-wide. Although marketing costs have stabilized under Korea’s newanticorruption law, operating profit likely missed consensus due to rises in R&D costs.
Hanmi and Donga ST to fall far short: Operating profit likely met consensus at GreenCross, Chong Kun Dang Pharmaceutical (CKD), and Yuhan, but missed by 10.8% at HanmiPharmaceutical, and by 47.6% at Donga ST. Sales growth at Green Cross was likely driven byexports of seasonal flu vaccine to the Pan American Health Organization. We believe CKD’s topline received a boost from robust sales of in-house-developed drugs. Yuhan likely posted solidsales growth for all of its licensed-in drugs, generics, supergenerics, OTC drugs, householdproducts, and APIs. Hanmi likely saw a rise in domestic sales thanks to in-house-developeddrugs—despite an absence of Galvus sales and an increase in R&D spending. Meanwhile,despite its out-licensing deal with Abbvie (that generates KRW4b in sales and KRW1.8b inoperating profit every quarter this year), Donga ST is likely to post disappointing 2Q operatingresults, due to: 1) the National Health Insurance Service cutting Stillen reimbursements by30.9%; 2) the end of co-promotion for five GlaxoSmithKline drugs on Nov 30 last year; and 3)some exports being delayed until 2H.
Four to benefit from low bases in 3Q, but CKD to suffer from high base: In 3Q16,Yuhan, Hanmi, Green Cross, and Donga ST all suffered poor operating profits due to rises inmarketing and R&D costs (Yuhan), a decline in upfront payments and an earnings slump atBeijing Hanmi (Hanmi), demand for seasonal flu vaccinations being delayed until 4Q16(Green Cross), and a 30.9% cut to the National Health Insurance Service’s reimbursements forStillen (Donga ST). In contrast, CKD posted solid operating profit thanks to its marketing costscoming in flat y-y. In light of this, base effect should play a key role in 3Q results this year.
Yuhan in particular deserves attention, as the introduction of new licensed-in drugs shoulddrive its quarterly sales above the KRW400b mark—which would be a record for a Koreanpharmaceutical firm.
Top picks—Yuhan (near term), Hanmi (longer); Green Cross promising:During the approaching earnings season, Yuhan should emerge as an attractiveinvestment for its solid earnings momentum and valuation merit. Hanmi remainsattractive from a longer-term perspective as many of its pipeline drugs are now in latephaseclinical trials worldwide. Green Cross deserves attention, as the US FDA is likely toapprove its IVIG at end-2017.
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