LGLIFESCIENCES068870KS0114

1、70,00055,5000.0analystcompany reporthealthcarepharmaceuticalsequity koreaabcglobal researchlg life sciences (068870 ks)overweighttarget price (krw)share price (krw)forecast dividend yield (%)potential return (%) 26.1note: potential return equals the percentagedifference between the current share pri

2、ce andthe target priceow: raising earnings forecast, target price we raise 2012e-14e revenue and earnings forecasts mainlyon revised dpp-iv and royalty assumptions catalysts include approval of dpp-iv-metformin combo, out-licencing of dpp-iv to other regions, pentavaccine winsdechsbc epshsbc pe2011

3、a 2012 e456 498118.6 108.62013 e94857.1 reiterate ow; we raise our tp to krw70,000 (up 27.3% fromkrw55,000) on higher dpp-iv and higher core valuationsperformanceabsolute (%)1m32.13m14.912m57.4relative (%)26.610.145.5we expect the re-rating to continue. we expect lglss new drugs zemiglo (dpp-ivfor d

4、iabetes), euforvac-hib (pentavalent paediatric combo-vaccine), sr-hgh (for growthdeficiency) and generics (including those for pfizer) to drive pharma division growth(67% of 2011 revenue) in the next 2-3 years. we estimate these products to account forc18.6% of total revenue by 2014e, driving c16.5%

5、 pharma growth that year. higher14 january 2013nam park*analystthe hongkong and shanghai bankingcorporation limited852 2996 .hkcarolyn poon*the hongkong and shanghai bankingcorporation limited+852 2996 .hkview hsbc global research at:http:/*employed by a non-us affiliate ofhsbc securities (usa) inc,

6、 and is notregister ed/qualified pursuant to finraregulationsissuer of report: the hongkong andshanghai bankingcorporation limiteddisclaimer &disclosuresthis report must be readwith the disclosures andthe analyst certifications inthe disclosure appendix,and with the disclaimer,which forms part o

7、f itprofitability of these drugs is set to drive margin expansion, helped by royalties frommochida and sanofi-aventis. accordingly, we raise our 2012e-14e revenue by 3-6%, andour 2012e-14e eps significantly off a low base based mainly on revised dpp-ivassumptions and royalties. our new 2014e revenue

8、 and net income forecasts are c3% andc30% above consensus, respectively. by 2014e, we forecast ebitm to reach c11.1% andfor positive shareholder value creation.more catalysts ahead. we expect more catalyst-driven upside in the next 1-2 years. thisyear, we look for out-licensing to partners of zemigl

9、o for other emerging markets,unicef/paho tender wins for euforvac-hib, completion of p3 trials in korea ofzemiglo-metformin combo, us fda approval for adult-use sr-hgh and potential neworders/business expansion.reiterate ow. our revised target price of krw70,000 (previously krw55,000) isderived from

10、 a sotp valuation, comprising a 2013e pe target for core operations and adcf for the pipeline. for core operations, we use an unchanged single-stage pe methodbased on roe and long-term growth; from this, we derive a 2013e pe target of 13.7x(previously 13.4x) and value of krw38,000/share. for the pip

11、eline, we use an unchangeddcf method to derive a value of krw32,000/share (previously krw24,000), assuminga wacc of 10.5%.risks include earnings deterioration, failure to find partners for us/eu sr-hgh marketingand for biosimilars, approval delays and emerging nations marketing risks. also, the bala

12、ncesheet is more leveraged than historically due to heavy capex in the past two years.index kospi index enterprise value (krwb) 1070.9index level 2,007 free float (%) 68ric 068870.ks market cap (usdm) 873.7bloomberg 068870 ks market cap (krwb) 825.6source: hsbc source: hsbclg life sciences (068870 k

13、s)pharmaceuticals14 january 2013financials & valuationfinancial statementskey forecast driversabcyear to12/2011a12/2012e12/2013e12/2014eyear to12/2011a 12/2012e12/2013e12/2014eprofit & loss summary (krwb)pharmaceuticals253259288335revenueebitdadepreciation & amortisation381.531.3-18.8401

14、.337.2-22.6440.846.8-23.8498.278.9-23.7non-pharmaveterinary medicinesfine chemicals302076352582382688412795operating profit/ebit12.514.623.055.2net interestpbt-5.86.2-4.89.4-4.817.9-5.349.5valuation datahsbc pbttaxationnet profithsbc net profit7.69.4-1.08.48.417.9-2.015.915.949.5-7.442.142.

15、1year toev/salesev/ebitda12/2011a2.733.412/2012e2.728.812/2013e2.523.312/2014e2.213.8cash flow summary (krwb)ev/icpe*3.2121.72.9111.42.758.62.422.2cash flow from operationscapexcash flow from investment26.9-71.0-62.432.4-73.2-71.941.0-55.4-55.671.7-56.4-56.7p/navfcf yield (%)dividend yield (%)3.7-4.

16、80.03.6-4.50.03.4-1.70.03.01.10.0dividendschange in net debtfcf equity0.047.6-44.20.027.0-41.90.017.6-15.40.03.59.8note: * = based on hsbc eps (fully diluted)balance sheet summary (krwb)price relativeintangible fixed assetstangible fixed assetscurrent assetscash & otherstotal assetsoperating lia

17、bilitiesgross debtnet debtshareholders funds26.4218.0220.951.3498.782.9169.6118.3248.227.7267.3197.142.0527.083.1187.3145.3256.629.6297.1182.724.3544.384.5187.3163.0272.531.7327.7222.643.6617.092.2210.1166.4314.758571535714857143571385713357128571235715857153571485714357138571335712857123571invested

18、 capital331.1367.0400.6446.22011201220132014lg life sciences ltd.rel to kospi indexratio, growth and per share analysissource: hsbcyear to12/2011a12/2012e12/2013e12/2014enote: price at close of 09 jan 2013y-o-y % changerevenueebitdaoperating profitpbthsbc eps11.9-16.7-42.5-65.4-16.652.99.

19、29.925.757.890.390.313.068.7139.9176.8164.3ratios (%)revenue/ic (x)roicroeroaebitda marginoperating profit marginebitda/net interest (x)net debt/equitynet debt/ebitda (x)cf from operations/net debt5.447.73.83.67.756.63.96.04.059.83.525.11.211.

20、614.38.315.811.114.9per share data (krw)eps reported (fully diluted)hsbc eps (fully diluted)dpsnav456456014,974498498015,262948948016,2102,5052,505018,715214%12%10%8%6%lg life sciences (068870 ks)pharmaceuticals14 january 2013operating outlook we expect the re-rating to continue based on

21、potential catalyststhat raise confidence that lgls can deliver long-term growth andmargin expansion these catalysts in turn are driven by the sustained investmentlgls has made in its pipeline that is starting to monetise zemiglo, euforvac-hib, sr-hgh and generics (including those forpfizer) to drive

22、 revenue, margin expansion from 2013 onwardsabcrerating set to continueover the next 2-3 years zemiglo (dpp-iv),euforvac-hib (pentavalent combo-vaccine), sr-hgh and generics (including those for pfizer) areto drive pharma division growth (67% of 2011roic/waccrevenue). we expect these products to acc

23、ount forc18.6% of total revenue by 2014e, driving c16.5%y-o-y pharma growth that year. higherprofitability of these original drugs, high-yield4%2%0%201020112012e 2013ewacc roic2014ebiologics, branded generics are set to drive marginexpansion, helped substantially by royalties frommochida and sanofi-

24、aventis. by 2014e, weforecast ebitm to reach c11.1% and for positiveshareholder value creation. as such, we expect thelargest negative on the company and stock - poorprofitability - to be addressed comprehensively.potential catalysts for 2013-14source: company data, hsbc estimatesfurther down the li

25、ne, we believe markers ofprogress with mabs, namely positive clinicaltrials, progress with mochida in facilityinvestment, and selection of partners for ex-japanbiosimilars, to also catalyse the stock.eventout-licensing to global partners of zemiglo for other emerging marketsunicef/paho tender wins f

26、or euforvac-hibcompletion of p3 trials in korea of zemiglo-metformin combous fda approval of adult use slow-release human growth hormoneus fda nda filing of paediatric version of slow-release human growth hormonestart of kfda p3 trials of an enbrel biosimilarpotential new orders/businesses across bu

27、siness linesout-licensing to global partners of sr-hgh for us/eu marketslikely timing20131h132h134q13-1q14201420142013-142014potential stock impacthighhighmidhighmidmidmid/highhighsource: hsbc, company information3krwbnkrwkrwbnlg life sciences (068870 ks)pharmaceuticals14 january 2013revenue steadil

28、y rising on new drugs inc vaccine, dpp-ivrevenue breakdown (2011) dominated by pharmaabc60050040030020010014%12%10%8%6%4%2%finechemicals20%veterinarymedicines5%pharmaceuticals67%02009 2010 2011 2012e 2013e 2014erev enue %y -o-y (rhs)0%-nonpharma8%source: company data, hsbc estimatesmargins improving

29、 on monetisation of new productssource: company data, hsbc estimateseps sharp increase from a low base20%15%10%5%0%3,0002,5002,0001,5001,0005000200%150%100%50%0%-50%-100%2009201020112012e 2013e 2014e2009 2010 2011 2012e 2013e 2014eebitda margin ebit marginnet margineps%y -o-y (rhs)source: company da

30、ta, hsbc estimatesnet debt, net debt/equity stabilising on lower capex, r&dsource: company data, hsbc estimatesroe/roa set to sharply rise starting this year20015010050080%60%40%20%0%25%20%15%10%5%200920102011 2012e 2013e 2014e0%net debtnet debt/equity (rhs)200920102011roe2012eroa2013e2014e4sour

31、ce: company data, hsbc estimatessource: company data, hsbc estimateslg life sciences (068870 ks)pharmaceuticals14 january 2013key growth driversproprietary dpp-iv - major revenueand margin driverout-licencing of lgls zemiglo (gemigliptin) aproprietary dpp-iv for t2d to sanofi-aventishas several posi

32、tives for lgls short-termmilestone payments, mostly through 2012e-14e,long-term earnings from royalties and productsales starting in earnest in 2014e, and highercapacity utilisation that will help marginexpansion. we see more upside as lgls expandsout-licencing to other regions, potentially duringth

33、is year. dpp-iv now accounts for c26% of ourvaluations and domestic sales alone could reachover 15% of pharma revenue by 2015e.vaccines shift towards higher-valueadd continuesshift higher margin vaccines from hbv anddomestic influenza vaccine sales. in particular thedomestic vaccine is very low marg

34、in since it is notlglss own product, and the companyeffectively performs just a distribution service.but starting this year, we expect long-termportfolio restructuring to drive the vaccinesbusinesss growth and profitability. in augustforecast assumptions2012, lgls received who prequalification (pq)f

35、or its pentavalent pediatric vaccine euforvac-hib(for diphtheria, tentanus, pertussis, hepatitis b andhaemophilus influenzae type b (hib), enabling itto bid for tenders held by un bodies, such asunicef and paho, representing a total marketof cusd350m (c220m doses). there is a shifttowards combo vacc

36、ines compared to mono-vaccines, driven by the latters lower costs forstocking and administration.we expect lgls to start participating in biddingin 2h13 with sea, latam, and mea as targetmarkets. we believe lgls is well positioned inthe bidding process as there are only five playerswith who pq for c

37、ombo vaccines includingcrucell, three indian firms and lgls. granted,lgls could cannibalise its own hbv vaccinesales (for which it has a 40% share of the tendermarket), but we expect euforvac-hib sales tomore than compensate within three years oflaunch, plus lgls obviously benefits from thehigher pr

38、ofitability of euforvac-hib.we expect lgls to start trials of its polio mono-vaccine this year, which would enable it to offer ahexa-vaccine that incorporates polio by 2016,abcrev (krw bn)pharmaceuticalsnon-pharmaveterinary medicinesfine chemicalstotaly-o-y change (%)growth (%)pharmaceuticalsnon-pha

39、rmaveterinary medicinesfine chemicalstotalcontribution (%)pharmaceuticalsnon-pharmaveterinary medicinesfine chemicals2009274.54.023.132.9334.518.6%200932.9%2.7%-37.7%18.6%200982.1%1.2%6.9%9.8%2010246.423.120.063.3352.95.5%2010-10.1%477.5%-13.4%92.6%5.5%201069.8%6.5%5.7%18.0%2011252.830.319.775.5378.

40、47.2%20112.6%31.3%-1.5%19.2%7.2%201166.8%8.0%5.2%20.0%2012e259.534.925.481.5401.36.1%2012e-3.0%15.0%28.8%8.0%6.1%2012e64.7%8.7%6.3%20.3%2013e288.238.426.288.1440.89.9%2013e9.6%10.0%3.2%8.0%9.9%2013e65.4%8.7%5.9%20.0%2014e334.641.527.095.1498.213.0%2014e16.5%8.0%3.2%8.0%13.0%2014e67.2%8.3%5.4%19.1%so

41、urce: company data, hsbc estimates5lg life sciences (068870 ks)pharmaceuticals14 january 2013increasing the firms competitiveness in the tendermarket. longer term, i.e. post-2016, lgls couldstart to enter the more lucrative but high-entry-barriers private vaccination market; anyindications towards t

42、his objective in the next 2-3years would be positive.sr-hgh approvals, partnering remainupcoming catalystsa key potential catalyst this year is slow-releasesustained human growth hormone (sr-hgh)which accounts for ckrw13,700 (c20%) of ourtotal valuation. recall that approval of the adultversion woul

43、d position lgls very well formarketing partner tie-ups, as well boding well forthe more important pediatric version. we believethat any delays in gaining fda approval could berelated to regulator comfort with the productionprocess, rather than any issues with the safety andefficacy data of the drug

44、itself. our confidence ofthe drugs fda approval is supported by datapublished in jcem (the journal of clinicalendocrinology & metabolism), most recently injune 2011 and in february 2012. we expect theadult version to be on the us market in 2014.pfizer generics start to contributemeaningfully sta

45、rting 2014/15we expect the pfizer generics business to startcontributing meaningful revenues starting2014/15. under the agreement with pfizer, thescope of this agreement is for korea only. lglsperforms the r&d, manufacturing and takes careof regulatory approvals. pfizer is responsible forthe mar

46、keting and bears half of the r&d costs.last year, lgls produced c7 drugs for pfizer.this year, lgls aims to expand the portfolio toover 30 products, potentially doubling the numbernext year. the longer-term target is to producec100 drugs for the pfizer brand.6mab biosimilars some way away start

47、contributing in 2017/18in november 2012, lgls agreed with mochidapharmaceutical of japan to co-develop andcommercialise mab for korea, japan andemerging markets. lgls is to receive technicaland milestone royalties; it will also supply trialand commercial batches. we view this tie-up withmochida posi

48、tively, since it reduces thedevelopment risk. mochida is a good partner, withexperience in clinical trials and approvals forbiologics. furthermore, lgls has the rights toglobally use data from japan trials. the pipelinecomprises three mabs, led by tnfcept, abiosimilar for enbrel which is in kfda p1

49、trials;product launch is targeted for 2016-17.heading towards cash flowbreakevenwe estimate lgls carried ckrw150bn net debtas at end-2012, and was cash flow negative. weexpect the firm to be close to cash flow breakevennext year, and to turn cash flow positive by 2015e.this is driven not only by imp

50、roving revenue andmargins, but also lower r&d and capex to salescompared to previous years. we forecast r&d/sales to fall to c16% by 2015 from c18.5% in 2012,though absolute r&d is to rise gradually tockrw94m by 2015e from ckrw74m in 2012. weforecast capex for 2013-14e at ckrw55-56bn per

51、year, similar to ckrw50-55bn last year, mostly onadding facilities to the o-song plant. total capexon the plant is ckrw200bn, of which half has beenspent to date. indeed, as the new products comeonline this year (mostly pfizer generics and dpp-iv), we expect utilization to rise from less than10% las

52、t year to c30% this year.abcvalue70,00038,00032,000lg life sciences (068870 ks)pharmaceuticals14 january 2013forecasts and valuations we raise our 2012e-14e revenue forecasts by 3-6% and raise our2012e-14e eps significantly off a low base our 2014e revenue and net income forecasts are c3% and c30%ab

53、ove consensus, respectively we raise our tp by 27.3% to krw70,000 on higher dpp-iv andhigher core valuationsabcforecast revisionsbased on mainly our revised assumptions of dpp-iv plus royalty income from mochida, we raiseour 2012-14e revenue forecasts by 3-6%, andraise our 2012-14e eps significantly

54、 off a verylow base. we now forecast lglss 2012e-14e net13.4x) for the core operations of the firm and adcf for the pipeline.valuations summarypipeline - dcfcore operations - 13.7x 2013e petotalprofit to reach ckrw8-42bn. our 2014e revenueand net income forecasts are c3% and c30%above consensus, res

55、pectively. note that 2012e-dividendtotalsource: hsbcn/a70,00013e profitability is marginal, so comparison withconsensus is relatively meaningless.valuationsour new target of krw70,000 (previouslykrw55,000) is derived from a sotp valuation,comprising a 2013e pe target of 13.7x (previouslyfor the core

56、 operations, we use a single-stage pemethod based on roe and long-term growth(unchanged). we derive our target valuation usingthe following formula: target pe = (roe - g) (roe coe - g). we use the following keyassumptions: adjusted roe at 17.4%, rf at 3.0%,erp at 7.5%, beta at 1.0 and growth at 5.5%

57、.forecast revisions_ revised _ _ previous _ _ change_2012e2013e2014e2012e2013e2014e2012e2013e2014erevenuegpebitnet profiteps (krw)401.3194.514.68.4498440.8216.023.015.9948498.2261.355.242.12,505388.310420.8198.911.96.6390471.8238.840.428.61,7003%7%165%4765%4766%5%9%94%143%143%6%9%37%47%47

58、%gp marginop marginnet profit margin48.5%3.6%2.1%49.0%5.2%3.6%52.5%11.1%8.5%46.7%1.4%0.0%47.3%1.4%1.6%50.6%1.4%6.1%source: hsbc estimates7lg life sciences (068870 ks)pharmaceuticals14 january 2013hsbc versus consensus (krwbn, %)under our research model, for stocks without aabchsbcsalesebitdaebitnet

59、incomeeps (krw)ebitda marginebit marginnet marginconsensussalesebitdaebitnet incomeeps (krw)ebitda marginebit marginnet marginhsbc/consensussalesebitdaebitnet incomeeps2012e401.34989.3%3.6%2.1%2012e400.328.35.5(0.1)(8)7.1%1.4%0.0%2012e0.2%31.5%167.6%nmnm2013e440.846.823.015.994810.6%5.2%3

60、.6%2013e411.635.611.76.23708.6%2.8%1.5%2013e7.1%31.5%97.2%156.2%156.2%2014e498.278.955.242.12,50515.8%11.1%8.5%2014e482.568.844.132.41,92414.3%9.1%6.7%2014e3.2%14.7%25.3%30.2%30.2%volatility indicator, the neutral band is 5pptsabove and below the hurdle rate for korea stocksof 10.5%. our target price of krw70,000 impliesa potential return of