Valuation summary
Company Stock Market Cap – EPS Consensus – –––– P/E –––– –––– P/B –––– Yield name ticker (HK$mn) FY14E FY15E FY14E FY15E FY14E FY15E
(HK$) (HK$) (x) (x) (x) (x) (%) Quintiles* Q US 62,832.2 2.70 3.09 24.5 21.1 n.a. n.a. 0.0 Covance Inc* CVD US 47,025.2 3.80 4.27 28.0 24.9 3.5 3.1 0.0 Parexel Int’l* PRXL US 27,017.2 2.17 2.75 29.8 23.1 6.3 5.0 0.0 Wuxi Pharmatech* WX US 22,947.3 1.85 2.11 22.4 19.6 3.5 3.0 0.0 Sinopharm 1099 HK 75,956.8 1.10 1.30 20.0 17.1 2.1 1.9 1.6 Shanghai Pharma 2607 HK 54,609.0 0.93 1.06 14.1 12.4 1.3 1.2 1.8 Sihuan Pharma 460 HK 45,291.5 0.17 0.21 21.0 17.1 4.1 3.5 1.4 CMS 867 HK 30,377.5 0.06 0.07 28.4 22.5 6.3 5.3 1.2 Pioneer Pharma 1345 HK 6,373.3 0.23 0.31 16.7 12.5 4.1 3.4 3.5 Fudan Zhangjiang 1349 HK 5,501.1 0.11 0.13 43.7 37.0 n.a. n.a. 0.0 Essex Bio 1061 HK 1,876.2 0.11 0.17 30.6 19.8 5.9 4.8 0.6 Huadong Medicine 000963 CH 28,234.4 2.16 2.97 30.1 21.9 7.2 5.8 1.6 Hangzhou Tigermed 300347 CH 11,994.0 0.76 1.09 75.0 52.3 5.8 6.5 n.a
Source: Bloomberg, BOCOM Int’l, as of Feb 22, 2015, * EPS consensus are denominated in USD
Outsourcing is increasingly adopted by the major pharmaceutical companies, due to: 1) patent cliff; 2) lengthy and costly R&D process; 3) stricter regulatory scrutiny on drug promotions; and 4) the emergence of small-scale biotech companies. CRO (Contract Research Organization) is the most common and widely accepted model used in the industry. The global CRO market grew at a CAGR of 14% during 2007-2013 and we expect this growth momentum to sustain, given: 1) more R&D investments are shifted towards outsourced services; and 2) CROs are broadening its coverage to gradually participate in the entire processing chain, from drug development to product manufacturing.
China CRO industry has been ramping up quickly in recent years, registering a CAGR of 25% during 2007-2013, reaching US$2bn. There are ~500 local companies involved in CRO market in China, of which the leading five represent ~15% market share. The CSO (Contract Sales Organization) market in China has also been growing rapidly, which grew at a CAGR of 38% in 2008-2013 to RMB13bn. The two largest CSOs in China are China Medical System (867.HK) and Pioneer Pharma (1345.HK), both of which focus on products manufactured by overseas companies. They took up ~28% share of the China CSO market, according to a Frost & Sullivan report.
CSO market in China proved to have similar business trends and opportunities as in the international market. Instead of building in-house sales teams, certain MNCs are collaborating with local CSOs in China on promotion and marketing. Various local pharmaceutical companies with in-house sales representatives also seek to become CSOs for MNCs, in order to enrich their product portfolios.
The fragmentation of China’s pharmaceutical industry provides a unique opportunity for CSO market expansion, as we believe: 1) local CROs in China will expand its business scope into the CSO business; 2) key distributors are taking the initiatives to start participating in the CSO market, such as Sinopharm (1099.HK); 3) Shanghai Pharm (2607.HK) has been developing its internal CSO business unit; 4) the unique approach taken by Sihuan Pharma (460.HK) implies business model
Sector Report Healthcare Sector
Healthcare Sector
Outsourcing trend on the rise
Outsourcing is increasingly adopted by the major pharmaceutical companies as it allows for better flexibility and cost efficiency.
CRO is the most common and well accepted model used by the industry, and CROs in China have been ramping up quickly in recent years.
We believe CSO presents notable business potential in China, given the fast expanding market and the fragmented nature of the healthcare industry.
Sector Valuation (A+H)
(X)
FY15E weighted avg P/E 24.6
FY16E weighted avg P/E 20.3
FY15E weighted avg P/B 4.3
Source: Company data, BOCOM Int’l
Historical P/E Chart
0 5 10 15 20 25 30
Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Hk_Healthcare +1 STD -1 STD
Source: Bloomberg
1 – Year Sector Performance
80 90 100 110 120 130 140 150 Fe b -1 4 M ar -1 4 A p r-1 4 M ay -1 4 Ju n -1 4 Ju l-1 4 A u g-1 4 Se p -1 4 O ct -1 4 N o v-1 4 D ec -1 4 Ja n -1 5 Fe b -1 5
Hk_Healthcare Hang Seng Index
Source: Bloomberg Milo Liu milo.liu@bocomgroup.com Tel: (852) 2977 9387
UP
MP
OP
UP
MP
OP
Outsourcing is being used as a widely accepted business strategy among the major pharmaceutical companies globally as well as in China. This trend has been basically driven by: 1) patent cliff, estimated to bring in significant lost sales to the pharmaceutical companies; 2) lengthy and costly R&D process for a new drug, which typically requires more than 10 years of development and substantial upfront investment; 3) stricter regulatory scrutiny on drug promotions; and 4) the emergence of small-scale biotech companies. Outsourcing allows pharmaceutical companies to better preserve flexibility and efficiency, reduce costs, turn fixed costs into variable costs, and move assets off the balance sheets. The complexity of the pharmaceutical value chain offers phenomenal outsourcing opportunities in the industry.
Figure 1: Estimated sales of off-patented drugs result in patent cliff (US$bn)
14.6 15.3 28.7 7.0 12.6 10.4 6.2 1.3 4.2 3.6 3.0 0 5 10 15 20 25 30 35
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Spend on off-patented drug
Source: IMS Health Data, BOCOM Int’l
Figure 2: Lengthy process of drug development
Contract Research Organization (CRO) is the most common and widely accepted model in the industry. According to Frost and Sullivan, the world’s CRO market was ~US$16bn in 2007 and surged to ~US$35bn in 2013 at a CAGR of 14% during the period. We expect this growth momentum to sustain, driven by: 1) increasing R&D investments (at clinical trial stage) shifted towards outsourced services; and 2) CROs are broadening its coverage to gradually participate in pre-clinical research and post-clinical research.
Figure 3: Global CRO market size (US$bn)
Figure 4: Global clinical CRO penetration rate
16% 19% 11% 14% 17% 11% 13% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0 5 10 15 20 25 30 35 40 2007 2008 2009 2010 2011 2012 2013 Global CRO Market Size YoY
33% 35% 36% 38% 40% 42% 44% 20% 25% 30% 35% 40% 45% 50% 2009 2010 2011 2012 2013 2014E 2015E Outsourcing Penetration
Source: Frost and Sullivan, BOCOM Int’l Source: Frost and Sullivan, BOCOM Int’l
China CRO industry has been ramping up quickly in recent years, growing at a CAGR of 25% during 2007-2013 to US$2bn and occupying ~7% of global market share in 2013. There are several globally renowned CRO companies, including Quintiles (Q.US), Covance (CVD.US) and Parexel (PRXL.US), which have entered the Chinese market through proprietorship, corporation or acquisition, setting the industry standard in early years. There are also active local CROs, such as Wuxi Pharmatech (WX.US), Venture Pharma (8225.HK), ShangPharma, Asymchem and Hangzhou Tigermed (300347.CH). They are the leading local CRO companies in China, together representing ~15% of China CRO market share.
Figure 5: China CRO market size (US$bn)
16% 34% 24% 31% 31% 18% 16% 15% 15% 17% 17% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E China CRO Market Size YoY
Source: Genetic Engineering & Biotechnology News
Contract Sales Organization (CSO) has been emerging over the last two decades. Multinational Pharmaceutical Companies (MNCs) generally outsource their drugs sales when the drugs are mature and the patents expire, or in the territories where they have yet to establish their own sales teams. For example, in 2008, MSD cut 1,200 sales personnel and outsourced sales of Cozaar and Hyzza to InVentiv Health. MNCs have been continuously cutting their in-house sales teams over the recent years, owing to: 1) cost-saving pressure due to patent cliff; and 2) stricter regulatory scrutiny on drug promotions. Some small R&D-focused biotech companies with no in-house sales teams also prefer to use CSOs for product launches.
The global CSO market is smaller than the CRO market, given: 1) it has only been around for two decades, relatively new compared with CRO market; and 2) different countries deploy slightly different approaches which require more flexibility and nimbleness in coping with market regulations, in our view.
Figure 6: Global CSO market size (US$bn)
Figure 7: Global CSO market share
16% 8% 15% 13% 11% 13% 14% 12% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2007 2008 2009 2010 2011 2012 2013 2014 Global CSO Market Size YoY
Quintiles 29% United Drug 17% InVentiv 14% Publicis Touchpoint 10% PDI. Inc. 4% Others 26%
Source: Capgemini Consulting
http://www.capgemini-consulting.com/blog/accelerating-life-sciences-transf ormation/2013/05/disrupting-the-traditional-commercial-model
Source: Sutherland Global Services
http://issuu.com/sutherlandresearch/docs/contract_sales_organizations_mar ket
CSO market in China proved to have similar business trends and opportunities as in the international market. Instead of building their in-house teams from scratch, several MNCs are collaborating with local CSOs in China. Various local pharmaceutical companies, which have their in-house sales representatives, also seek to become CSOs of MNCs, in order to enrich their product portfolios. For example, Pioneer Pharma (1345.HK) is the CSO partner of Alcon for ophthalmic remedies, while Essex Bio (1061.HK) is the CSO partner of Pfizer for ophthalmic remedies. Moreover, there are a few examples of R&D-focused companies with CSO business. For example, NT Pharma (1011.HK) formed CSO partnerships with Sanofi Pasteur and Fudan-Zhangjiang (1349.HK), primarily for the vaccines and Libod (Doxorubicin Liposome Injections) products, respectively.
The CSO market in China has been growing rapidly at a CAGR of 38% during 2008-2013 to RMB13bn. The two largest CSOs in China are China Medical System (867.HK) and Pioneer Pharma (1345.HK), both of which focus on products manufactured by overseas companies. The CSO market in China is more fragmented than global CSO market, as the leading five companies only represent ~44% market share in the CSO market in 2012,
China CSO market size has been outgrowing the CRO market since 2012, attribute to: 1) a lack of R&D capability in drug development; 2) high demand due to large population; and 3) the global CRO that began in early 1970s when China was under-developed.
Figure 8: China pharmaceutical CSO market size (RMBbn)
Figure 9: Market share of CSOs in China
62% 38% 38% 27% 31% 31% 32% 32% 30% 0% 10% 20% 30% 40% 50% 60% 70% 0 5 10 15 20 25 30 35 402008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Market Size YoY
China Medical System 18% Pioneer Pharma 9% Eddingpharm 8% NT Pharm 5% Rxmidas 4% Others 56%
Source: Frost & Sullivan (2012), BOCOM Int’l Source: Frost & Sullivan (2012), BOCOM Int’l
The fragmented nature of China’s pharmaceutical industry provides a unique opportunity for CSO market expansion. China currently has 4,500 pharmaceutical companies, of which only 15% have established in-house sales teams, and the rest rely heavily on agents. There are currently ~500,000 sales reps in China, and less than 20% of them are employed as in-house sales reps, with the rest self-employed or employed by agents. These agents are generally in small scale and loosely controlled by the manufacturers, and they work on a buy-and-sell basis in certain regions. We believe the unique approach of Sihuan Pharma (460.HK) to manage its agents (composed of ~20,000 sales reps) is a good example, indicating business transformation from the pharmaceutical agent model to the CSO model.
We expect local CROs in China will expand its business scope into the CSO business. The world’s largest CRO Quintiles has already expanded the scope of business into CSO in China, providing integrated end-to-end solutions to the pharmaceutical companies in different stages. Some domestic CROs also added CSO services to the business model, such as CareWay, which believes the flexible business model could secure long-term strategic collaborations with the pharmaceutical companies. More local CROs will likely follow suit, eventually becoming comprehensive providers of a broad range of drug development and other support services for the healthcare industry.
Domestic pharmaceutical distributors are also taking the initiative to start participating in the CSO market. Sinopharm (1099.HK) signed a cooperation agreement with AstraZeneca for the marketing and distribution of Betaloc in Jun 2014. We consider the cooperation a milestone for Sinopharm to expand into the CSO business. In Oct 2014, Sinopharm and Pfizer launched the “County Hospital Program” to improve the medical capabilities of county hospitals, and help these hospitals to set up standardized Stoke Centers and Chest Pain Centers (CPC) in order to enhance their influence as a step of preparation for future drug marketing initiatives. We expect Sinopharm to become a major CSO partner of Pfizer in the future, and the new business model may be considered an extension of its business to the upper stream of the supply value chain.
The difference between agent and CSO is that agent is responsible for sales while CSO brings integrated solutions to the pharmaceutical company, including product positioning, hospital penetration, technical support, product management and most importantly, certain risk-taking (such as price erosion from the tendering) for the pharmaceutical companies.
Other pharmaceutical distributors are also developing CSO businesses. For example, Huadong Medicine (000963.CH) is the CSO partner for several local and overseas biopharmaceutical manufacturers, such as Octapharma for human serum albumin (HSA), and LG Life Sciences for Hyaluronic Acid (HA).
Shanghai Pharma (2607.HK) is also developing its internal CSO business unit. Shanghai Pharma has over 20 subsidiaries covering the entire value chain from manufacturing, distribution to retail, and has become one of the largest CSOs of Pfizer in China for products such as Prevenar, an invasive disease prevention drug for infants. They recently introduced “integration of manufacturing and distribution strategy” to boost internal synergies, allocating more sales force from the distribution and retail subsidiaries to the manufacturing subsidiaries. We consider this a great example of internalizing the CSO model, and we will not be surprised to see other pharmaceutical companies follow suit. We believe CSOs present notable business potential in China, and we believe: 1) local CROs in China will expand its business scope into the CSO business; 2) key distributors are taking the initiatives to start participating in the CSO market, such as Sinopharm (1099.HK); 3) Shanghai Pharm (2607.HK) has been developing its internal CSO business unit; 4) the unique approach taken by Sihuan Pharma (460.HK) implies business model transformation from the pharmaceutical agent model to the CSO model.
Figure 10: Valuation of listed peers
Name 中文名 Stock Code Mkt Cap Currency –––––––P/E––––––– –––––––P/B––––––– –Gross Margin (%)– Operating Margin (%) (HK$mn) 13A 14E 15E 13A 14E 15E 13A 14E 15E 13A 14E 15E
International peers
Quintiles Transnational 昆泰跨国控股公司 Q US 62,832.2 USD 33.0 24.5 21.1 n.a. n.a. n.a. 26.2 35.2 35.4 9.1 13.9 14.4 Covance Inc 科文斯股份有限公司 CVD US 47,025.2 USD 32.4 28.0 24.9 3.2 3.5 3.1 27.4 30.6 30.9 8.4 11.4 12.3 Parexel International 百瑞精鼎国际公司 PRXL US 27,017.2 USD 37.9 29.8 23.1 4.8 6.3 5.0 26.4 33.5 34.7 6.8 10.1 10.9 Wuxi Pharmatech 药明康德有限公司 WX US 22,947.3 USD 25.1 22.4 19.6 3.7 3.5 3.0 36.6 38.7 38.6 18.2 19.3 19.6
Simple average 33.6 26.2 22.2 4.0 4.4 3.7 Weighted average 38.7 26.1 22.3 4.3 2.6 2.2 Domestic peers Sinopharm 国药控股股份有限公司 1099 HK 75,956.8 HKD 24.3 20.0 17.1 2.0 2.1 1.9 8.0 8.1 8.1 3.6 3.9 3.9 Shanghai Pharma 上海医药 2607 HK 54,609.0 HKD 15.5 14.1 12.4 1.5 1.3 1.2 12.8 12.3 12.0 3.4 3.6 3.6 Sihuan Pharma 四环医药 460 HK 45,291.5 HKD 25.8 21.0 17.1 3.6 4.1 3.5 78.2 79.3 79.1 30.9 38.3 38.7 China Medical System 康哲药业 867 HK 30,377.5 HKD 37.1 28.4 22.5 4.9 6.3 5.3 54.5 54.4 54.6 32.6 30.0 30.0 China Pioneer Pharma 中国先锋医药 1345 HK 6,373.3 HKD 16.0 16.7 12.5 3.0 4.1 3.4 30.4 32.8 34.9 21.3 22.3 23.9 Fudan Zhangjiang 复旦张江 1349 HK 5,501.1 HKD 47.8 43.7 37.0 8.4 n.a. n.a. 92.1 n.a. n.a. 26.1 n.a. n.a. Essex Bio 亿胜生物科技 1061 HK 1,876.2 HKD 33.7 30.6 19.8 4.6 5.9 4.8 89.6 79.7 78.6 21.1 15.6 17.2 Huadong Medicine 华东医药 000963 CH 28,234.4 CNY 38.5 30.1 21.9 7.8 7.2 5.8 19.9 21.1 21.6 6.2 6.1 6.5 Hangzhou Tigermed 泰格医药 300347 CH 11,994.0 CNY 72.3 75.0 52.3 9.1 5.8 6.5 44.8 46.9 46.1 26.6 28.8 26.5
Simple average 34.6 31.1 23.6 5.0 4.6 4.0
Weighted average 30.9 24.1 19.2 4.1 3.5 3.1
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Rating System
Company Rating Sector Rating
Buy: Expect more than 20% upside in 12 months Outperform (“OP”): Expect more than 10% upside in 12 months LT Buy: Expect more than 20% upside but longer than 12 months Market perform (“MP”): Expect low volatility
Neutral: Expect low volatility Underperform (“UP”): Expect more than 10% downside in 12 months
Sell: Expect more than 20% downside in 12 months
Research Team
Head of Research @bocomgroup.com @bocomgroup.com
Raymond CHENG, CFA, CPA, CA (852) 2977 9393 raymond.cheng
Strategy Economics
Hao HONG, CFA (852) 2977 9384 hao.hong Miaoxian LI (86) 10 8800 9788 - 8043 miaoxian.li
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Consumer Discretionary Property
Phoebe WONG (852) 2977 9391 phoebe.wong Alfred LAU, CFA, FRM (852) 2977 9235 alfred.lau
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Consumer Staples Renewable Energy
Summer WANG (852) 2977 9221 summer.wang Louis SUN (86) 21 6065 3606 louis.sun
Shawn WU (852) 2977 9386 shawn.wu
Healthcare Telecom & Small/ Mid-Caps
Milo LIU (852) 2977 9387 milo.liu Zhiwu LI (852) 2977 9209 lizhiwu
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Jerry LI (852) 2977 9389 liwenbing Miles XIE (852) 2977 9216 miles.xie
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Internet Transportation & Industrial
Yuan MA, PhD (86) 10 8800 9788 - 8039 yuan.ma Geoffrey CHENG, CFA (852) 2977 9380 geoffrey.cheng
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