jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2017/6/15/... · 2017. 6. 15 Pharmaceuticals(OVERWEIGHT) Earnings growth, R&D results in the spotlight in 2H Global, Korean pharma markets

2017. 6. 15

Pharmaceuticals(OVERWEIGHT)

Earnings growth, R&D results in the spotlight in 2H

● Global, Korean pharma markets to grow 6.3% and 4.4% pa, respectively. Multiple

blockbusters to come off patent over 2016-2020, benefiting Korean biosimilar firms.

● Sea change from 2012 as Korean healthcare integrates with global ecosystem.

Next five years, virtuous circle: stronger brands/track records →→→→ financial gains. ● Eye government policy, regulatory direction; visibility to improve in 2H. Be

selective: buy firms with R&D successes, B2B track record, or improving earnings. ● Covered stocks: combined sales, operating profit to grow 14.1%, 47.9% y-y in 2017.

Medical aesthetics to stand out in 2Q; large pharmaceutical, biotech stocks in 2H. ● Top picks: Hanmi Pharm, Samsung Biologics, Hugel, Dentium, ST Pharm, Huons.

WHAT’S THE STORY?

Solid growth ahead for global, Korean pharmaceutical markets: The global pharmaceutical market is projected to grow at a 2016-2022 CAGR of 6.3% to reach USD1.12t, while its Korean counterpart should expand at 2017-2021 CAGR of 4.4% to KRW18.6t. Meanwhile, a second patent cliff is ahead: blockbuster drugs (including several biologics) worth USD249b will lose patent protection over 2016-2020. In short, things are looking good for the Korean companies that lead the global biosimilar market.

Sea change for Korean healthcare: Over 2012-2017, Korean healthcare firms made massive progress on R&D, B2B operations, and exports. Some signed large out-licensing deals with global pharmaceutical firms. Korea-made biosimilars dominate the global market, while Korea-made botulinum toxins and fillers are gaining global market share. We expect Korea to produce the world’s top biologics contract manufacturing organization and one of the world’s top-ten chemical-drug contract manufacturing services. Successes over the past five years owe much to the accumulation of technology, effective business strategies, investments by chaebol, and supportive government policies. Over the next five years, Korean healthcare firms should enter a virtuous cycle wherein stronger brand equities and track records lead to greater financial gains.

Monitor policy, regulatory direction: Korea’s healthcare industry should benefit if the government keeps election pledges to nurture the pharmaceutical, biotechnology, and medical device industries; halts the introduction of for-profit medical corporations; and raises subsidies for implants, hearing aids, and Alzheimer’s treatments. But prescription-drug makers will suffer if a total drug cost limit is enforced. Focus on firms specialized in OTC drugs, supplements, biotech, diagnostics, medical aesthetics, and medical devices.

To make visible progress on R&D, B2B fronts: In 2H, Hanmi Pharmaceutical should begin global Phase III clinical trials for Efpeglenatide and resume global Phase I trials for HM12525A/JNJ-64565111; Green Cross should win US approval for IVIG; Samsung Biologics should win US and European approval for three biosimilars; Medytox-Allegan should begin global Phase III trials for Innotox; Kolon Life Science should win domestic approval for Invossa; Genexine and Qurient should make progress on their B2B operations; and Seegene should begin supplying ODM products to Beckman Coulter.

Operating profit growth: We have operating profits at our covered large pharmaceutical firms, medium-sized pharmaceutical firms, biotech, medical-diagnostics, medical-aesthetics, and medical-device firms growing 32.9%, 12.6%, 123.2%, 26.5%, 51.6%, and 15.6% y-y, respectively, in 2017. Medical aesthetics profits should stand out in 2Q on rising demand. In 2H, large pharmaceutical firms should shine on base effect and SG&A cost-cutting; biotech firms should shine on export growth. We foresee outstanding earnings growth over 2Q-4Q for Hanmi Pharm, Donga ST, Celltrion, Seegene, and Hugel.

Team Analysts

Brian Lee Team Head (Pharm/Biotech) [email protected] 822 2020 7177

SunYoung Yoon (Pharm/Biotech) [email protected] 822 2020 7840

Kevin Kim (Medical Devices/Medical Aesthetics) [email protected] 822 2020 7178

Research Associate

Wonyong Park [email protected] 822 2020 7847

Sector Update

AT A GLANCE

Hanmi Pharmaceutical (128940 KS, KRW364,000)

Target price: KRW450,000 (23.6%)

Samsung Biologics (207940 KS,

KRW213,500)


Hugel (145020 KS, KRW451,900)


Dentium (145720 KS, KRW37,450)


ST Pharm (237690 KS, KRW48,400)


Huons (243070 KS, KRW58,800)

Target price: n/a

* Share price and financials based on May 26

Healthcare

2017. 6. 15

2

1H review: Poverty in the midst of plenty

Healthcare indices largely in line with market in 1H; stock performances diverge

Kospi Medical Supplies Index performing in line in 1H: The Kospi Medical Supplies Index

peaked at 11,297 on Jun 10, 2016, bottomed at 6,988 on Dec 2, 2016, and bounced back to stand at

8,888 on May 26, 2017. The index is up 17.1% ytd, in line with the Kospi’s ytd gains of 16.2%. The

index excluding Samsung Biologics was valued as high as 40.1x P/E (Jul 22, 2016) and as low as

18.5x (Nov 18, 2016). It was valued at 26.2x on May 26, 2017.

Kosdaq Pharmaceutical Index underperforming in 1H: The Kosdaq Pharmaceutical Index

peaked at 7,552 on Feb 5, 2016, bottomed at 5,662 on Mar 24, 2017, and crept back up to stand at

6,209 on May 26, 2017. The index is down 1.3% ytd, underperforming the Kosdaq, which has gained

2.3%. The index’s P/E valuation peaked at 39.4x (Jan 29, 2015) and hit bottom at 24.6x (Mar 24,

2017). It was valued at 26.3x on May 26, 2017.

Sector sentiment weakening: Investors have been in thrall to the IT sector in 1H on prospects of

record earnings amid a semiconductor supply shortage and smartphone launches. Cyclical sectors

have also appealed to those who anticipate US infrastructure investments and inflation under

President Trump. In contrast, the belief that the US has begun a period of rate hikes has reduced the

investment appeal of high-multiple sectors. Sentiment towards the healthcare sector weakened after

Hanmi Pharmaceutical in 2016 announced that some out-licensing contracts it signed in 2015 have

been revised or canceled. The sector has remained lackluster in 1H due to a lack of standout R&D

successes and earnings momentum. Still, steep share-price corrections in late 2016 made valuations

less demanding, leading shares to bottom out in 1Q.

Oversold stocks and those with earnings momentum bounce back in 1H: The Kospi

Medical Supplies Index performed in line with the Kospi, but stocks with earnings momentum

posted the steepest share-price gains. Among our covered healthcare stocks, Samsung Biologics is up

41.4% ytd, Medytox 42.1%, Hugel 40.7%, Hanmi Pharmaceutical 27.4%, and Yuhan 24.6%. Also,

stocks that had plunged more than 50% from their previous peaks have rebounded almost 20% from

their lows as bargain hunters snapped them up. Healthcare stocks that have rebounded strongly

include Huons Global (45.4%), Hanmi Pharmaceutical (36.8%), Hanmi Science (32.3%), and Jeil

Pharmaceutical (30.3%).

Contents


p2

Pharmaceutical market outlook

p7

Visible progress to be made on R&D and B2B fronts

p32

Government policy warrants attention

p52

Key issues in 2H p68

Solid earnings momentum in 2H

p87

Company p105

Healthcare

2017. 6. 15

3

Korean healthcare indices: Relative performances

Source: QuantiWise, Samsung Securities

Kospi sector indices: Year-to-date performances

Note: As of May 26


Kospi vs Kospi Medical Supplies Index vs Kosdaq Pharmaceutical Index


1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

0

2,000

4,000

6,000

8,000

10,000

12,000

2015 2016 2017

Kospi Medical Supplies (LHS) Kosdaq Pharmaceutical (LHS) Kospi (RHS)

(Pts) (Pts)Nov 5, 2015

Out-licensed Quantumproject to Sanofi

Sep 30, 2016Boehringer Ingelheim

terminated HM61713 contract

Nov 9, 2016Donald Trump wins

US election

Mar 19, 2015Out-licensed

HM71224to Eli Lilly

80859095

100105110115120

Jan Feb Mar Apr May

Kospi Kospi Medical Supplies

Kosdaq Kosdaq Pharmaceutical

Kosdaq Medical and Precision Machines

(Indexed: Jan 1, 2017 = 100)

(10)

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Healthcare

2017. 6. 15

4

Korean healthcare indices and sub-sectors: Relative performances

Note: Medical aesthetics (Medytox, Hugel, Humedix, Pharma Research Products, Caregen)

Diagnostics (Seegene, i-Sense, Boditech Med, AccessBio)

Source: QuantiWise, Samsung Secutieis

Korean healthcare indices and sub-sectors: Performances relative to parent index

Note: Kospi Medical Supplies index is compared to Kospi, the rests are to Kosdaq


Korean healthcare indices: Forward P/E


0

20

40

60

80

2015 2016 2017

Kospi Medical Supplies Kospi Medical Supplies (excl. Samsung Biologics)

Kosdaq Pharmaceuticals Kosdaq Medical and Precision Machines

Medical aesthetics Diagnostics

(x)

0

50

100

150

200

250

300

2015 2016 2017

Kospi Medical Supplies Kosdaq Pharmaceuticals

Kosdaq Medical and Precision Machines Medical aesthetics

Diagnostics

(Indexed: Jan 1, 2015 = 100)

(50)

0

50

100

150

200

2015 2016 2017

Kospi Medical Supplies Kosdaq Pharmaceuticals

Kosdaq Medical and Precision Machines Medical aesthetics

Diagnostics

(%pts)

Healthcare

2017. 6. 15

5

Korean healthcare firms: Top-20 share-price performers ytd

Note: As of May 26


Covered healthcare firms: Ytd share-price performances and 1Q17 operating performances

Note: * Based on Life Science division


0

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300

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Yuhan

Hanm

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Chong K

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Donga S

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Large pharmas SMEs Biotech Diagnostics Medical devices Medicalaesthetics

1Q17 sales growth (LHS) 1Q17 operating profit growth (LHS) Ytd share performance (RHS)

(% y-y) (%)

Turnedpos

Healthcare

2017. 6. 15

6

Korean healthcare stocks rebounded after plunging more than 50% from their peaks in 2016

Company name

Ticker

Current price 2016 peak 52-week low 52-week low vs

2016 peak (%)

Current price vs

52-week low (%)

Tego Science 191420 54,400 79,100 28,750 (63.7) 89.2

Green Cross Holdings 005250 35,600 49,700 20,250 (59.3) 75.8

Kolon Life Science 102940 162,700 223,862 104,300 (53.4) 56.0

Cellumed 049180 8,390 36,700 5,380 (85.3) 55.9

CMG Pharmaceutical 058820 3,420 7,907 2,300 (70.9) 48.7

Seoul Pharm 018680 11,500 18,100 7,870 (56.5) 46.1

Young Jin Pharm 003520 10,150 17,500 6,960 (60.2) 45.8

Huons Global 084110 34,250 64,338 23,550 (63.4) 45.4

MG MED 180400 37,700 53,600 26,500 (50.6) 42.3

Qurient 115180 29,700 58,300 21,050 (63.9) 41.1

LegoChem Biosciences 141080 33,000 49,000 23,500 (52.0) 40.4

GL Pharm Tech 204840 2,930 9,200 2,100 (77.2) 39.5

InBody 041830 28,550 58,400 20,750 (64.5) 37.6

Hanmi Pharm 128940 364,000 732,204 266,043 (63.7) 36.8

Medipost 078160 67,800 102,600 49,850 (51.4) 36.0

Hanmi Science 008930 69,200 159,342 52,302 (67.2) 32.3

DNA Link 127120 4,535 15,850 3,430 (78.4) 32.2

Je Il Pharm 002620 70,100 137,000 53,800 (60.7) 30.3

BIT Computer 032850 5,820 9,400 4,480 (52.3) 29.9

EstechPharma 041910 11,100 30,400 8,580 (71.8) 29.4

Mekics 058110 6,050 11,700 4,715 (59.7) 28.3

Anterogen 065660 22,500 41,000 17,600 (57.1) 27.8

Peptron 087010 41,800 73,000 32,800 (55.1) 27.4

Oscotec 039200 7,250 13,000 5,700 (56.2) 27.2

Chong Kun Dang Holdings 001630 72,300 136,000 56,900 (58.2) 27.1

Pharma Research Products 214450 40,650 82,700 32,000 (61.3) 27.0

YuYu Pharma 000220 10,550 17,350 8,330 (52.0) 26.7

JW Holdings 096760 9,370 17,500 7,400 (57.7) 26.6

Donga Socio Holdings 000640 150,500 239,500 119,000 (50.3) 26.5

Dio 039840 34,700 59,700 27,500 (53.9) 26.2

Shin Poong Pharm 019170 6,260 11,550 4,975 (56.9) 25.8

Next BT 065170 2,005 3,985 1,615 (59.5) 24.1

Kyung Nam Pharm 053950 5,680 10,000 4,600 (54.0) 23.5

C-Tri 047920 5,720 11,050 4,650 (57.9) 23.0

BioLeaders 142760 5,880 21,200 4,785 (77.4) 22.9

ilShin Biobase 068330 2,510 4,250 2,050 (51.8) 22.4

Choa Pharm. 034940 4,900 8,100 4,015 (50.4) 22.0

HS Vital 204990 6,210 34,650 5,090 (85.3) 22.0

Donga ST 170900 98,000 175,000 80,600 (53.9) 21.6

Green Cross Lab Cell 144510 25,200 62,500 20,950 (66.5) 20.3

Dae Hwa Pharm 067080 23,250 48,000 19,350 (59.7) 20.2

Cosmax BTI 044820 34,350 78,400 28,600 (63.5) 20.1

Hanall Biopharma 009420 13,150 26,700 10,950 (59.0) 20.1

Bota Bio 026260 1,165 9,120 976 (89.3) 19.4

EyeGene 185490 9,740 27,750 8,160 (70.6) 19.4

Humedix 200670 32,350 68,446 27,200 (60.3) 18.9

JW Pharmaceutical 001060 49,000 92,105 41,300 (55.2) 18.6

JW Shinyak 067290 7,890 13,750 6,680 (51.4) 18.1

FutureChem 220100 9,270 36,650 7,850 (78.6) 18.1


Healthcare

2017. 6. 15

7


Breakthrough-therapy approvals brighten outlook for global market

Worldwide pharmaceutical sales outlook: EvaluatePharma has the global pharmaceutical

industry growing at a 2016-2022 CAGR of 6.3% to reach USD1.12t, with a new wave of innovative

therapies approved by regulators over the last three years serving as the core engine. The market

research firm expects the orphan drug market to almost double over the same period, expanding at

an 11.5% CAGR to peak at USD217b in 2022, while generic sales should grow at a 6.2% CAGR to

USD115b. R&D programs should increasingly be oriented towards narrower patient populations

characterized by larger unmet need, limited market competition, and favorable environment to gain

approvals. Yet, tightening of insurance-benefit rules and drug-pricing policies by the US

administration and large pharmacy benefit managers (PBMs) warrant attention.

Worldwide biologics sales outlook: The world’s chemical and biologic drug markets should

continue to grow at CAGRs of 5.1% and 9.1%, respectively, through 2022 to reach USD827b and

KRW337b. Biotech product penetration increased from 16.9% in 2008 to 24.6% in 2016, and it

should hit 29% in 2022, when 50% of the value of the top-100 products comes from biologics (vs 30%

in 2008 and 47% in 2016).

Oncology should remain the fastest-growing therapy area, expanding at a 2016-2022 CAGR of 12.5%

to reach USD190b in annual sales and represent 16.3% of the global pharmaceuticals market (vs 10.7%

in 2015). Top player Roche should see its oncology sales grow 3.3% pa to USD32.2b over the same

period, though its market share is likely to slide to 17% (vs 30.9% in 2015) due to the release of

biosimilars (of Avastin, Herceptin, and Rituxan) after key patents expire. Anti-diabetes is forecast to

be the second biggest therapy area, with sales of USD66.1b in 2022 (6.8% CAGR), accounting for 5.7%

of the pharmaceuticals market (vs 5.4% in 2015). Sales of number-one anti-diabetes drug Lantus

should shrink at a 2016-2022 CAGR of 11.8% to USD3b in 2022 on the advent of biosimilars after

patent expiration. Accordingly, Sanofi’s anti-diabetes sales should slide 1.1% pa to USD7.7b in 2022,

while its market share should tumble from 20% to 11.7%. Meanwhile, anti-rheumatics should remain

a low-growth market, expanding just 1.6% pa to USD54.5b in 2022 due to price erosion caused by

the entry of biosimilars. We expect sales of the blockbusters Humira, Enbrel, and Remicade to

decline 0.7%, 3.2%, and 10.9% pa, respectively, to USD13.6b, USD7.2b, and KRW3.6b in 2022.

Contents


p2


p7


p32


p52



p87

Company p105

Healthcare

2017. 6. 15

8

Global prescription drug market

Note: Industry sales based on top-500 pharmaceutical and biotech companies; sales to 2015 are company-reported data;

sales forecasts based on a consensus of leading equity analysts

Source: EvaluatePharma, Samsung Securities

Global sales at risk from patent expiration


Global pharmaceutical market: Biologics vs conventional drugs


53 53 59 65 66 69 74 73 80 86 92 97 103 109 115 61 64 70 79 84 90 96 102 113 127 143 161 181 200 217

545 547 557 584 567 565 579 566 584 610

639 673

712 752

789

0

200

400

600

800

1,000

1,200

2008 2010 2012 2014 2016E 2018E 2020E 2022E

Generic Orphan Other prescription

(USDb)

2016-2022E CAGR: 6.3%

17 17 18 18 20 22 23 24 25 26 27 27 28 29 29

83 83 82 82 80 78 77 76 75 74 73 73 72 72 71

0102030405060708090

100

2008 2010 2012 2014 2016E 2018E 2020E 2022E

Biologic Chemical/unclassified

(Portion out of total drug market, %)

Biologic drugs within top 100Rapid increase in share of top 100 products:- 2008: 30%- 2015: 47%- 2022E: 50%

2022E spiltBiologic: n=46 (avg. USD3.8b)Chemical: n=55 (avg. USD3b)

30

7053 47 50 50

16

26 29 33

52

29 35

48 50

34 32 40

18 23

52

12 10 9 20

38

23 21 17

24 19 16 20 16 12 12

2

4 4 5

7

4 5

6 6

4 4

4

2 2

5

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1

2

34

5

6

7

8

0

10

20

3040

50

60

70

80

2008 2010 2012 2014 2016E 2018E 2020E 2022E

Total sales at risk (LHS) Expected sales lost (LHS)

Percentage of market at risk (RHS)

(USDb) (%)

Healthcare

2017. 6. 15

9

Top-10 therapy areas in 2022E: Market share and sales growth


0

2

4

6

8

10

12

14

16

18

20

(4.0) (2.0) 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

2022E market share (%)

(2015-2022E sales growth CAGR, %)

Oncology

Anti-diabetes

Immunosuppressants

Dematologicals

Anti-virals

Anti-rheumatics

Anti-hypertensives

Vaccine

Sensory organs

MS therapiesAnti-coagulants

Broncho-dilators

Anti-fibrinolytics

Anti-bacterials

Key growth drivers:Descovy (GILD), Genvoya (GILD)Bictegravir/F/TAF (GILD), Tirumeq (GSK)Key growth brakes:Harvoni (GILD), Sovaldi (GILD)Truvada (GILD), Atripla (GSK)

Key growth drivers:Opdivo (BMY), Revlimid (CELG), Keytruda (MRK), Ibrance (PFE), Perjeta (Roche), Tecentriq (Roche)Key patent expiries:Gleevec (Novartis, 2016), Rituxan (Roche, 2016+)Alimta (LLY, 2015+), Herceptin (Roche, 2014+)

Key contributors to CAGR growth:Stelara (JNJ); dupilumab (SAN) - expected 2017 global launch; Ozanimod (CELG) - expected 2018 launch

Anti-hyperlipidaemics

Healthcare

2017. 6. 15

10

Top-5 global oncology products in 2022E

Rank

Product

Generic name

Company

Pharmacological

class

Global sales (USDm)

Global market

share (%)

Status

2015 2022E CAGR (%) 2015 2022E

1 Opdivo Nivolumab Bristol-Myers Squibb,

Ono Pharmaceutical

Anti-programmed

death-1 (PD-1) MAb 1,119 14,634 44.0 1.3 7.7 Marketed

2 Revlimid Lenalidomide Celgene Immunomodulator 5,801 13,024 12.0 7.0 6.9 Marketed

3 Imbruvica Ibrutinib Abbvie, Johnson &

Johnson+Pharmacyclics BTK inhibitor 1,299 7,287 28.0 1.6 3.8 Marketed

4 Keytruda Pembrolizumab Merck Anti-programmed

death-1 (PD-1) MAb 566 5,959 40.0 0.7 3.1 Marketed

5 Ibrance Palbociclib Pfizer CDK 4&6 inhibitor 723 5,709 34.0 0.9 3.0 Marketed


Top-5 global anti-diabetes products in 2022E

Rank

Product

Generic name

Company

Pharmacological

class

Global sales (USDm)

Global market share (%)

Status

2015 2022E CAGR (%) 2015 2022E

1 Januvia/

Janumet

Sitagliptin

phosphate

Merck,

Ono Pharmaceutical,

Daewoong, Sigma-Tau,

Almirall

Dipeptidyl peptidase

IV inhibitor 6,333 5,913 (1.0) 15.2 9.0 Marketed

2 Victoza Liraglutide Novo Nordisk Glucagon-like peptide

1 agonist 2,682 4,133 6.4 6.4 6.3 Marketed

3 Jardiance Empagliflozin Boehringer Ingelheim

Sodium-glucose

cotransporter (SGLT-2)

inhibitor

118 3,932 65.0 0.3 6.0 Marketed

4 Invokana Canagliflozin Johnson & Johnson

Sodium-glucose

cotransporter (SGLT-2)

inhibitor

1,308 3,314 14.2 3.1 5.0 Marketed

5 NovoRapid Insulin aspart Novo Nordisk Insulin analogue 3,082 2,976 (0.5) 7.4 4.5 Marketed


Top-5 global anti-rheumatism products in 2022E

Rank

Product

Generic name

Company

Pharmacological

class

Global sales (USDm)

Global market share (%)

Status

2015 2022E CAGR (%) 2015 2022E

1 Humira Adalimumab Abbvie & Eisai Anti-TNF alpha MAb 14,359 13,645 (1.0) 29.4 25.0 Marketed

2 Enbrel Etanercept Pfizer & Amgen &Takeda Anti-TNF alpha MAb 9,037 7,177 (3.0) 18.5 13.2 Marketed

3 Remicade Infliximab

Johnson & Johnson,

Merck, Mitsubishi

Tanabe Pharma

Anti-TNF alpha MAb

8,151 3,635 (11.0) 16.7 6.7 Marketed

4 Simponi Golimumab Johnson & Johnson,

Merck

Anti-TNF alpha MAb 2,018 3,139 7.0 4.1 5.8 Marketed

5 Otezla Apremilast Celgene Phosphodiesterase

IV (PDE4) inhibitor 472 3,128 31.0 1.0 5.7 Marketed


Healthcare

2017. 6. 15

11

Novartis and Roche to vie for top spot: EvaluatePharma forecasts that Roche’s sales will grow

at a 2015-2022 CAGR of 4.5% to USD52.6b, its performance depending on sustained growth of

Perjeta and Gazyva, the launch of PD-1 inhibitor Tecentriq, and the success of multiple sclerosis drug

Ocrevus. Over the same period, Norvatis’ sales should expand at a 3.1% CAGR to USD52.5b, backed

by robust sales of Entresto, Cosentyx, and ribociclib (LEE001). The two heavyweights should

compete for leadership at least through 2022, but Roche’s higher exposure to biosimilars is worth

considering. Meanwhile, Allergan should rank ninth in 2022 with sales of USD30.7b (7.6% CAGR),

as Botox should be positioned as the 19th best-selling drug globally (with sales growing at an 8%

CAGR to USD4.8b by 2022). the research firm expects Shire and Celgene to achieve the highest

2016-2022 sales CAGRs (18.9% and 15.9% respectively)—the former largely thanks to the acquisition

of Baxalta, and the latter on sustained strength from Revlimid, and novel therapies Otezla and

Pomalyst.

Global prescription drug sales in 2022E: Top-10 companies


52.6(+2)

52.5(+0) 49.1

(-2) 45.4(+1) 39.8

(+2)39.2(-2) 32.5

(+1)31.0(+2)

30.7(+3)

30.2(-1)

4

3 2

4 4

2

35

8

402468101214161820

0

10

20

30

40

50

60

Roche Novartis Pfizer Sanofi Johnson &Johnson

Merck GlaxoSmithKline

AbbVie Allergan AstraZeneca

Global prescription sales (LHS) Global market share (RHS)

(USDb) (%)2022E sales

(Ranking change, 2015-2022E)

Healthcare

2017. 6. 15

12

R&D productivity and breakthrough-therapy approvals improving: The world’s

pharmaceutical R&D spending should grow at a 2015-2022 CAGR of 2.8% to USD182b, equivalent to

16.2% of 2022 sales. Record-high approvals—ie, of 56 new molecular entities (NMEs)—by the US

FDA in 2015 testifies to the increasing productivity of the pharmaceutical pipeline. R&D spending

per innovative drug hit a 10-year low of USD2.7b in 2015. Furthermore, total US sales of all drugs in

their fifth year in 2015 amounted to an all-time high of USD32.4b, evidence of a rise in the number of

breakthrough therapies.

Ocrevus to be a blockbuster: Roche’s multiple sclerosis drug Ocrevus (ocrelizumab) is at the

head of EvaluatePharma’s list of the top-20 most valuable R&D projects, with a net present value

(NPV) of USD17b and 2022 sales projected at close to USD4b. Next on the list is Dupilumab

(Sanofi/Regeneron’s novel therapy for atopic dermatitis), with 2022 sales forecast at USD3.7b and an

estimated NPV of USD12.9b. EvaluatePharma estimates that Amgen’s Humira biosimilar ABP501

will generate sales of USD810m in 2022. It estimates its NPV at USD6.3b.

Global pharmaceutical R&D spending


US FDA approval count vs total US sales of drugs in their fifth year


8.5 12.7 8.3 14.1 6.4 9.2 4.3 5.6 5.4 13.5 11.4 13.6 16.0 27.1 32.4

32

26

3538

28 2926

3134

26

35

43

35

50

56

0

10

20

30

40

50

60

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US sales 5-years post launch (LHS) Number of drugs approved (RHS)

(USDb) (Number of new drugs)

132.9 129.0 130.1 137.5 136.5 138.2 143.1 149.8 153.8 159.0 163.4 167.5 172.3 177.0 182.0

(3.0)

0.9 5.7

(0.7)

1.2

3.6 4.7

2.6 3.4 2.8 2.5 2.9 2.7 2.8

(4)

(2)

0

2

46

8

10

12

1416

0

20

40

60

80100

120

140

160

180200

2008 2010 2012 2014 2016E 2018E 2020E 2022E

Pharma R&D spending (LHS) Growth (RHS)

(USDb) (% y-y)

2008-2015 CAGR: 1.7%

2015-2022E CAGR: 2.7%

Healthcare

2017. 6. 15

13

Top-20 most valuable R&D projects (ranked by net present value)

Rank

Product

Company

Phase

(current)

Pharmacological class

Global sales

in 2022E

(USDm)

New

entry?

Net present

value**

(USDm)

1 Ocrevus Roche Filed Anti-CD20 MAb 3,962 New entry 16,965

2 Dupilumab Sanofi Phase III Anti-interleukin-4 (IL-4) & interleukin-13 (IL-13) MAb 3,725 12,884

3 Ozanimod Celgene Phase III Sphingosine-1-phosphate (S1P) 1 & 5 receptor

modulator 2,112 9,458

4 Durvalumab AstraZeneca Phase III Anti-programmed death-1 ligand1 (PD-L1) MAb 1,673 8,276

5 Abemaciclib Eli Lilly Phase III Cyclin-dependent kinase (CDK) 4 & 6 inhibitor 1,619 New entry 7,919**

6 Veliparib AbbVie Phase III Poly (ADP-ribose) polymerase (PARP) inhibitor 1,714 New entry 7,502

7 Semaglutide Novo Nordisk Phase III Glucagon-like peptide 1 (GLP-1) agonist 2,356 New entry 6,889

8 Aducanumab Biogen Phase III Anti-beta-amyloid (Abeta) MAb 939 New entry 6,889

9 LEE011 Novartis Phase III Cyclin-dependent kinase (CDK) 4 & 6 inhibitor 1,410 New entry 6,370

10 Emicizumab Roche Phase III Anti-factor IXa/X bispecific MAb 1,765 New entry 6,336

11 ABP501 Amgen Filed Anti-tumor necrosis factor alpha (TNFa) MAb 810 New entry 6,273

12 Lanadelumab Shire Phase III Anti-plasma kallikrein MAb 1,064 New entry 5,915

13 Solanezumab Eli Lilly Phase III Anti-beta-amyloid (Abeta) MAb 1,556 5,577**

14 Fovista Ophthotech Phase III Anti-platelet derived growth factor (PDGF)-B aptamer 1,973 5514*

15 Apalutamide Johnson &

Johnson Phase III Anti-androgen 1,160 New entry 5,366

16 Bictegravir/

F/TAF

Gilead

Sciences Phase III

Nucleoside reverse transcriptase inhibitor (NRTI) &

HIV integrase inhibitor 3,489 New entry 5,276

17 Verubecestat Merck Phase III Beta secretase cleaving enzyme (BACE) 1 inhibitor 1,480 New entry 5,219**

18 JCAR017 Juno

Therapeutics Phase II

Anti-CD19 chimeric antigen receptor (CAR) T cell

therapy 1,086 New entry 4,836

19 Mongersen Celgene Phase III Smad7 mRNA antisense 1,205 New entry 4,719

20 Sirukumab Johnson &

Johnson Phase III Anti-interleukin-6 (IL-6) MAb 1,134 New entry 4,708

Top 20 36,232 142,893

Other 133,225 394,980

Total 169,457 537,873

Net present value of R&D projects May 2015 492,827

Change (%) 9.1

Note: * Fovista figures assume best-case scenario and do not full reflect development risk

** As of Aug 19, 2016

Forecasts for Abemaciclib, Solanezumab, and Verubecestat may have been adjusted downward due to recent announcements that those drugs failed in

clinical trials


Healthcare

2017. 6. 15

14

Biosimilar market outlook bright—Multiple biologics to go off patent over 2016-2022

USD249b of sales at risk over 2016-2022: With USD249b of sales at risk over 2016-2022,

EvaluatePharma says that the pharmaceutical industry is on the brink of a second patent cliff that

will usher in an era of biosimilars challenging top biologics. Sales of the most popular biologics (eg,

Humira, Enbrel, Remicade, Lantus, Rituxan, Avastin, and Herceptin) seem destined to slide. The

London-based consulting firm contends that some analysts are too conservative in their forecasts of

the impact that upcoming biosimilars will have.

Implications of biosimilar competition: IMS Health has studied the effects of biosimilars—

specifically, epoetin (EPO), granulocyte colony-stimulating factor (G-CSF), human growth hormone

(hGH), and anti-tumor necrosis factor (anti-TNF)—on price, volume, and market share in Europe.

The data show that in some countries, prices of some original drugs fell by almost 70% after the

release of biosimilars. Even in cases where biosimilars were less competitive, their existence was an

essential step to generating a more competitive environment, which drove down prices of original

biologics. The correlation between a biosimilar’s market share and price was weak. Competition also

influenced the behavior of originators, encouraging them to: 1) reduce prices sufficiently to protect

market share; 2) manufacture their own biosimilars; or 3) develop competitive bio-betters. In

countries where biologics usage/availability was once low, price cuts appear to have had a significant

impact on access.

Price* change: 2015 vs one year before biosimilar entrance

Note: * Per treatment day

Accessible market = products within the same ATC4 code

Total market = both the accessible and non-accessible markets

Source: IMS Health, Samsung Securities

(33) (32)

(19)

(8)

(34)(32)

(13)

(8)

(26)(23)

(13)

(4)

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

EPO G-CSF hGH Anti-TNF

Biosimilar and reference product Accessible market Total market

(%)

Healthcare

2017. 6. 15

15

Price* change, by country: 2015 vs one year before biosimilar entrance

(%) Portugal Slovakia Poland Bulgaria Slovenia Finland Sweden Denmark

EPO (61) (52) (49)

G-CSF (59) (58) (50)

hGH (31) (47) (47)

Anti-TNF (19) (21) (15)


Based on both the accessible and non-accessible markets


Price* change** vs biosimilar market share

EPO hGH

G-CSF Anti-TNF


** 2015 vs one year before biosimilar entrance


(80)

(60)

(40)

(20)

0

20

0 20 40 60 80

(2015 biosimilar market share, %)

Change in price per treatment day (%)

(60)

(40)

(20)

0

20

0 20 40 60 80


Change in price per treatement day (%)

(40)

(20)

0

20

0 20 40 60 80



(80)

(60)

(40)

(20)

0

0 20 40 60 80



Healthcare

2017. 6. 15

16

Impact of lower prices on patient access in countries with low initial usage

(%)

Change* in

price per

treatment day

Treatment days per

capita (year before

biosimilar entrance)

Change* in

volume sales

per treatment day

Note

EPO

Romania (36) 0.036 460 Low

Bulgaria (46) 0.125 120 historical

Poland (49) 0.027 186 usage

Ireland (18) 0.523 (32) High

Austria (36) 0.942 (28) historical

Germany (45) 0.412 (25) usage

hGH

Romania (27) 0.024 177

Czech Republic (20) 0.060 54

Poland (47) 0.043 78

G-CSF

Romania (48) 0.004 498

Bulgaria (58) 0.001 1,016

Slovakia (59) 0.004 371

Anti-TNF

Bulgaria (19) 0.099 131

Czech Republic (12) 0.232 53

Slovakia (8) 0.492 78

Note: * 2015 vs one year before biosimilar entrance


Anti-TNF drug prescription outlook (volume-based)

Note: TD (treatment day)


Healthcare

2017. 6. 15

17

EMA-approved anti-TNF alpha drugs: Indications

Indication Humira Remicade Remsima Inflectra Enbrel Benepali Simponi Cimzia

Rheumatoid arthritis � � � � � � � �

Juvenile idiopathic arthritis � �

Psoriatic arthritis � � � � � � � �

Ankylosing spondylitis (AS) � � � � � � � �

Axial spondyloarthritis without radiographic evidence of AS � � � � �

Crohn’s disease � � � �

Pediatric Crohn’s disease � � � �

Ulcerative colitis � � � � �

Paediatric ulcerative colitis � � �

Psoriasis � � � � � �

Paediatric plaque psoriasis � �

Hidradenitis suppurativa �


EMA-approved anti-TNF drugs: Administration information

Generic name Product Classification Frequency Injection method

Reference Biosimilar Non-reference Non-accessible Subcutaneous Intravenous

Remicade � Every 8 weeks �

Infliximab Remsima � Every 8 weeks �

Inflectra � Every 8 weeks �

Etanercept Enbrel � Once or twice a week �

Benepali � Once a week �

Adalimumab Humira � Twice a week �

Certolizumab pegol Cimzia � Every 4 weeks

Golimumab Simponi � Monthly �


Healthcare

2017. 6. 15

18

Infliximab: Volume and price change in Europe after biosimilar launch

(%)

Biosimilar market

share in 2015

Change* in price per

treatment day

Change* in volume per

treatment day

Treatment

days

per

capita

First year

biosimilar

recorded

sales

Vs

reference

product

Vs

accessible

market

Vs

total

market

Vs

reference

product

Vs

accessible

market

Vs

total

market

Vs

reference

product

Vs

accessible

market

Vs

total

market

Austria 3 3 2 (1) (1) (3) 43 43 41 0.19 2015

Belgium 1 1 0 (14) (14) (7) 23 23 21 1.05 2015

Bulgaria 100 100 16 (50) (50) (19) 96,660 96,660 131 0.23 2014

Czech Republic 21 21 11 (16) (16) (12) 56 56 53 0.35 2014

Denmark** 68 68 32 (29) (29) (15) 23 23 12 1.02 2015

Finland 32 32 12 (10) (10) (9) 33 33 38 0.88 2013

France 4 4 2 (10) (10) (7) 20 20 24 0.70 2015

Germany 10 10 3 (4) (4) (2) 23 23 25 0.56 2015

Greece** 0.01

Hungary 25 25 7 (7) (7) 1 (5) (5) 14 0.36 2014

Ireland 4 4 1 (1) (1) (2) 46 46 30 1.31 2014

Italy 11 11 3 (1) (1) 1 6 6 13 0.37 2015

Netherlands** 13 13 5 (3) (3) 0 4 4 3 1.03 2015

Norway 68 68 29 (48) (48) (14) 51 51 28 1.52 2013

Poland 78 78 15 (38) (38) (3) (18) (18) 16 0.04 2014

Portugal** 15 15 6 (20) (20) (8) 33 33 27 0.37 2013

Romania 11 11 4 (12) (12) (10) (15) (15) 7 0.21 2014

Slovakia 9 9 5 (6) (6) (8) 95 95 78 0.88 2014

Slovenia 3 3 1 (18) (18) (9) 33 33 34 0.57 2015

Spain 13 13 5 (2) (2) 0 9 9 18 0.55 2015

Sweden 8 8 2 (10) (10) (21) 14 14 48 1.29 2015

United Kingdom 9 9 3 0 0 0 26 26 22 0.69 2015

Europe 13 13 5 (8) (8) (4) 20 20 23 0.56

Note: * 2015 vs one year before biosimilar entrance

** Netherlands (2009-2015); Denmark (2007-2015); Portugal (2010-2015); Greece, only retail panel available


Healthcare

2017. 6. 15

19

Korea’s pharmaceutical market outlook solid

Korea’s pharmaceutical sales outlook: According to IMS Health, Korea’s pharmaceutical

market should grow at a 2017-2021 CAGR of 4.4% to KRW18.58t—around twice stronger the

country’s estimated annual GDP growth of 2.3% over the same period. Cancer therapy and

immunomodulators should achieve the highest growth, averaging 8.5% pa, while anti-diabetes and

digestive-system medicines should also outpace the market’s growth, averaging 5.2% pa. Meanwhile,

sales of systemic anti-infective materials are projected fall sharply as sales of hepatitis C treatments

weaken.

Growth via population aging, chronic disease, wider coverage for four big diseases:

The market expansion will be driven by population aging, according to IMS Health. In 2016, the

elderly—ie, those aged 65 and above—accounted for only 13% of people covered by the National

Health Insurance Service (NHIS), but their medical costs accounted for 39% (KRW25.2t) of the

NHIS total. The life expectancy of Korean females born in 2030 should be 90 years, up from 85.2

years in 2015, while males born in 2030 should have a life expectancy of 84.1 years (vs 79 years in

2015). The country’s medical costs should surge over 2017-2021 as: 1) more people are developing

chronic diseases due to societal aging; and 2) national health insurance coverage is expanding for

four major diseases—ie, cancers, rare diseases, cardiovascular diseases, and cerebrovascular diseases.

The government plans to improve the frameworks for drug prices and health insurance to support

the bio industry.

Generics to continue to lead market growth in Korea: IMS Health says that generics

represented 32% of Korea’s pharmaceutical market in 2016, and that figure should barely budge

through 2021, edging down just 0.1%pts. Meanwhile, the developed-market average should climb

1.1%pts to 16.8% over the same period. Why will market share stagnate in Korea? Because

penetration is already high, and prices are almost on par with those of off-patent drugs, which serves

to discourage substitution with generics. Meanwhile, original drugs accounted for 45.2% of 2016

sales in Korea, around half of which came from off-patent drugs; original drugs made up 73.8% of

sales in developed markets, while off-patent drugs accounted for around just 20%.

Biologics exports to keep growing strongly: According to Korea’s Ministry of Food and Drug

Safety, the pharmaceutical market grew 3.4% y-y to KRW17t in 2015, with exports leaping 31.1% y-y

to KRW3.3t and imports rising 1.9% y-y to KRW5.6t for a trade deficit of KRW2.3t. In the same year,

biologics production rose 2.3% y-y to KRW1.72t. Biologics exports leapt 47.7% y-y to KRW915.7b

while imports shrank 9.5% y-y to KRW835.3b, turning Korea to a trade surplus of KRW80.4b.

Biologics exports have accelerated, led by solid biosimilar exports, and this trend should continue as

multiple biosimilar are commercialized and exports by bio-CMO firms increase.

Chaebols’ pharmaceutical arms to thrive: Chaebols have also entered the pharmaceutical

market—eg, CJ Healthcare was established in 1984; SK Chemicals (formerly SK Pharma) in 1998;

Isu Abxis in 2001; LG Life Sciences in 2002; SK Biopharmaceuticals (spun off) and Samsung

Biologics in 2011; Samsung Bioepis in 2012; and SK Biotek (spun off) in 2015. These chaebol arms

are now emerging as growth drivers of Korea’s pharmaceutical market and, notably, enjoying rapid

earnings improvements. The combined sales of LG Life Sciences, CJ Healthcare, SK Chemicals,

Samsung Biologics, SK Biotek, and Isu Abxis leapt 27% y-y to KRW1.795t in 2016, and the group

turned y-y to a combined operating profit of KRW110.7b. We expect those companies to enjoy

sustained growth as their investments start to bear fruit.

Healthcare

2017. 6. 15

20

Korean pharmaceutical market outlook


Generic drugs’ market share in major countries/regions

Country Category Market share (%)

2016 2021E

Major developed countries* Original 73.8 73.7

Generic 15.7 16.8

Others 10.5 9.5

US Original 76.7 77.2

Generic 16.0 16.1

Others 7.4 6.7

EU5** Original 66.8 65.3

Generic 17.8 19.9

Others 15.4 14.8

Korea Original 45.2 46.4

Generic 32.0 31.9

Others 22.9 21.7

Note: * UK, Germany, France, Italy, Spain, US, Japan

** UK, Germany, France, Italy, Spain


NHIS: Medical costs paid for the elderly

Category 2010 2011 2012 2013 2014 2015 2016 Growth (% y-y)

Number of days in or visiting hospital (million) 907 926 952 969 990 990 1,022 3.2

Aged below 65 667 674 683 682 686 678 694 2.4

Aged 65 and over 239 252 269 287 302 312 327 4.9

Portion (%) 26.4 27.2 28.3 29.6 30.6 31.5 32.0

Medical costs (KRWb) 44 46 48 51 54 58 65 11.4

Aged below 65 30 31 31 33 35 36 40 9.4

Aged 65 and over 14 15 16 18 20 22 25 14.8

Portion (%) 32.2 33.1 34.2 35.4 36.3 37.6 38.7

Medical costs per day in hospital (KRW) 48,125 49,928 50,262 52,596 55,004 58,545 63,213 8.0

Aged below 65 44,328 45,901 46,138 48,231 50,426 53,334 56,976 6.8

Aged 65 and over 58,710 60,713 60,719 62,980 65,306 69,859 76,446 9.4

Source: National Health Insurance Service, Samsung Securities

(8)

(4)

0

4

8

12

16

0

4

8

12

16

20

2007 2009 2011 2013 2015 2017E 2019E 2021E

Historical/baseline (LHS) Forecast (LHS) Growth (RHS)

(KRWt) (% y-y)

Healthcare

2017. 6. 15

21

Korean pharmaceutical industry: Exports and imports Korean biologics industry: Exports and imports

Source: Ministry of Food and Drug Safety, Samsung Securities

Source: Ministry of Food and Drug Safety, Samsung Securities

Major chaebol: Pharmaceutical/biotech sales Major chaebol: Pharmaceutical/biotech operating profit

Note: * Based on CJ CheilJedang’s pharmaceutical division over 2011-2014

** Based on Life Science division

Source: Company data, Samsung Securities

Note: * Based on CJ CheilJedang’s pharmaceutical division over 2011-2014

** Based on Life Science division


(5)

0

5

10

15

20

2010 2011 2012 2013 2014 2015

Pharmaceutical production Pharmaceutical exports

Pharmaceutical imports Pharmaceutical trade balance

(KRWt)

(1,000)

(500)

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015

Biologic production Biologic exports

Biologic imports Biologic trade balance

(KRWb)

0

500

1,000

1,500

2,000

2012 2013 2014 2015 2016

LG Life Science CJ Healthcare*

SK Chemicals** Samsung Biologics

SK Biotek Isu Abxis

(KRWb)

(300)

(200)

(100)

0

100

200

2012 2013 2014 2015 2016

LG Life Science CJ Healthcare*

SK Chemicals** Samsung Biologics

SK Biotek Isu Abxis

(KRWb)

Healthcare

2017. 6. 15

22

Sea change for Korea’s healthcare industry over 2012-2017

Korean players burst onto global scene via tie-ups with multinationals

Korea a rising star: Korea has emerged as a key player in the global healthcare ecosystem, with

many Korean pharmaceutical firms signing a slew of partnership contracts with multinationals over

the past five years—a stark departure from the past, when the country’s presence on the global scene

was low. Korean companies are: 1) providing multiple candidates for original drugs to global firms; 2)

standing at the forefront of the world’s biosimilar market and Asia’s medical aesthetics market; and 3)

positioning themselves as production bases for biologics and chemical drugs. Turning its gaze

overseas, the Korean healthcare sector, which accounts for just 2% of the world’s healthcare market,

should enjoy export-driven earnings momentum.

Korean healthcare firms in the global healthcare ecosystem

Source: Samsung Securities

Healthcare

2017. 6. 15

23

Korean players out-license new drug candidates: To date, the US FDA has approved the

following Korean-made pharmaceuticals: 1) original chemical drugs by LG Life Sciences (Factive,

2003) and Donga ST (Sivextro, 2014); and 2) Afstyla biologics by SK Chemicals (2016). Most Korean

players out-license new drug candidates they discover, because: 1) the have limited capital for R&D; 2)

they lack experience in carrying out global clinical development; 3) they are unsure of the process of

gaining approval and handling health insurance providers and related authorities in developed

countries; or 4) they are weak on the marketing front. Donga ST in 2007 out-licensed Sivextro to

Trius Therapeutics, which was later acquired by Merck, which went on to commercialize the drug. SK

Chemicals’ Afstyla also hit the shelves after an out-licensing contract with CSL (Australia) in 2010.

Out-licensing contracts signed over 2013-2016: Medytox in Sep 2013 out-licensed Innotox,

the world’s first liquid botulinum toxin (BTX; a bio-better) to Allergan for USD362m. It granted

Allergan exclusive development and sales rights worldwide (save Korea and Japan). Over 2015-2016,

Hanmi Pharmaceutical agreed to export its technology for autoimmune therapy HM71224 to Eli Lilly

(in a deal worth USD690m), the Quantum Project (diabetes drugs) to Sanofi, diabetes and obesity

treatments HM12525A and JNJ-64565111 to Johnson & Johnson (USD9150m), and anti-cancer RAF

kinase inhibitor HM95573 to Genentech (USD910m). Kolon Life Science out-licensed Invossa, the

world’s first allogeneic cell therapy for degenerative arthritis, to Mitsubishi Tanabe for JPY45.7b in

2016. Donga ST in Dec 2016 said it had out-licensed DA-4501, a cancer immunotherapy candidate

targeting Mer TK, to AbbVie Biotechnology in a deal worth up to USD525m.

Healthcare

2017. 6. 15

24

Korean pharmaceutical and biologics players’ alliances

Date Exporter Importer Code/product Category Contract value Remarks

May 1997 LG Life Sciences GSK Factive Antibiotics Total: USD40.5m Cancelled in 2002, LGLS

launched the product by itself

Feb 2004 Pacific

Pharmaceuticals Schwarz PAC200030 Pain killer

Total: USD107.25m

Upfront fees: USD3.25m Stopped development

Jun 2005 Bukwang

Pharmaceutical Pharmasset

Clevudine

(Levovir)

Hepatitis

B treatment

Total: USD30m

Upfront fees: USD6m

Clinical trials stopped;

contract cancelled

Sep 2005 Ilyang

Pharmaceutical TAP

Ilaprazole

(Noltec) Antiulcer drugs

Total: USD44m

Upfront fees: USD3.5m

Phase III clinical trials

in US stopped

Feb 2007 Donga

Pharmaceutical Trius Sivextro Antibiotics

Total: USD17.2m

Royalties: 5-7% Launched globally

Nov 2007 LG Life Sciences Gilead Science LB84451 Liver disease

treatment

Total: USD200m

Upfront fees: USD20m Phase II clinical trials stopped

Dec 2008 Mezzion Warner Chilcott Udenafil

(Zydena)

Erectile dysfunction

treatment Total: USD69m Cancelled

Jun 2009 SK Chemicals CSL NBP601

(Afstyla) Hemophilia treatment n/a Launched globally

Dec 2012 Legochem Bio AstraZeneca n/a Cephalosporin

antibiotics

Total: USD140m

Upfront fees: USD2.45m Cancelled

Sep 2013 Medytox Allergan Innotox Botulinum toxin Total: USD362m

Upfront fees: USD65m

To start global Phase

III clinical trials in 2H17

Oct 2014 Olipass BMS PNA platform Gene therapy

platform n/a

Developed anti-sense gene

therapy (utilizing PNA platform)

Mar 2015 Hanmi Pharm Eli Lilly HM71224 BTK inhibitor Total: USD690m

Upfront fees: USD50m On Phase ll global clinical trials

Jul 2015 Hanmi Pharm Boehringer

Ingelheim HM61713

Molecular-targeted

cancer therapy

Total: USD730m

Upfront fees: USD50m Cancelled

Aug 2015 Legochem Bio Fosun ADC

technology

Molecular-targeted

cancer therapy Total: KRW20.8b

Signed exclusive out-licensing

deal for China

Oct 2015 Alteogen 3S Bio ADC

technology

Molecular-targeted

cancer therapy n/a


deal for China

Oct 2015 Genexine Tasly 3 types

(incl. GX-H9) Fc-fusion protein

Total: KRW115

Upfront fees: KRW23b


deal for China

Nov 2015 Hanmi Pharm Sanofi Quantum

project

Long-acting diabetes

treatment

Total: EUR3.9b

Upfront fees: EUR400m

To start Phase III global clinical

trials in 2H17

Nov 2015 Hanmi Pharm Johnson &

Johnson HM12525A

Diabetes/obesity

treatment

Total: USD920m


To start Phase II global clinical

trials in 2H17

Nov 2015 Hanmi Pharm ZAI Lab HM61713 Molecular-targeted

cancer therapy

Total: USD92m

Upfront fees: USD7m


deal for China

Jan 2016 Chong Kun Dang Fuji Pharma CKD-11101 Nesp biosimilar n/a Signed exclusive out-licensing

deal for Japan

Feb 2016 Genexine Fosun GX-E2 Anemia treatment Total: USD44.5m

Upfront fees: USD2m


deal for China

Feb 2016 Anterogen Ishin

Pharmaceutical

ALLO-ASC

-sheet

Diabetic foot ulcer

treatment

Total: USD75m

Upfront: USD1m


deal for Japan and Taiwan

Apr 2016 Donga ST Tobira

Therapeutics DA-1229 NASH treatment Total: USD61.50m

Signed an out-licensing deal

exclusively for North America,

Europe and Australia

Jun 2016 Crystal Genomics Aptose

Biosciences CG026806

Acute myeloid

leukemia treatment

Total: KRW352.4b,

Upfront: KRW1.16b


deal for Japan and Taiwan

Jul 2016 Yuhan Luoxin YH25448

Molecular-targeted

cancer therapy

for NSCLC

Total: USD120m

Upfront: USD6m


deal for China, Hong Kong,

and Macao

Sep 2016 Ilyang

Pharmaceutical R-Pharm Noltec Antiulcer drugs Total: USd200m


deal for Russia, Armenia,

and Belarus

Sep 2016 Hanmi Pharm Genentech HM95573 Molecular-targeted

cancer therapy

Total: USD910m

Upfront: USD80m Phase l in Korea (in progress)

Nov 2016 Kolon Life

Science

Mitsubishi Tanabe

Pharma Invossa

Degenerative arthritis

treatment

Total: KRW500b

Upfront fees: KRW27.3b


deal for Japan

Dec 2016 Donga ST Abbvie

Biotechnology DA-4501

Immuno-oncology

therapy

Total: USD525m


Still in drug candidate discovery

phase

Source: Local press, Company data, Samsung Securities

Healthcare

2017. 6. 15

25

Korean biosimilar developers leading the way

Biologics turn to trade surplus for first time in 2015: Korea’s pharmaceutical market

shrank a touch in 2015, creeping down 0.7% y-y to KRW19.1b, with production, exports, and imports

up 3.4%, 31.1%, and 1.9% y-y, respectively, to KRW17t, KRW3.3t, and KRW5.6t. Meanwhile, Korea’s

biologics market contracted a sharp 17.3% y-y to KRW1.64t, with production and exports rising 2.3%

and 47.7% y-y, respectively, to KRW1.72t and KRW815.7b, and imports falling 9.5% y-y to

KRW835.3b. The biologics market accounted for 8.5% of the nation’s pharmaceutical market

(down 1.7%pts y-y), while biologics production, exports, and imports represented a respective 10.1%,

27.5% and 14.9% (down 0.1%pts, up 3.1%pts, and down 1.9%pts y-y). The nation’s biologics industry

suffered a trade deficits before turning to its first-ever surplus in 2015. Backed by solid growth in

biologics exports, the pharmaceutical trade deficit also declined rapidly.

Korea’s biosimilar exports to top KRW1t in 2017: Korea’s combined biosimilar exports

climbed 112.3% y-y to KRW905.2b in 2016, which figure includes consolidated sales from Celltrion

Healthcare (up 88.3% y-y to KRW757.7b) and Samsung Bioepis (up 517% y-y to KRW147.5b).

According to PR Newswire, Celltrion Healthcare’s Remsima (a Remicade biosimilar) and Samsung

Bioepis’ Benepali (an Enbrel biosimilar) boast volume-based market shares of 40% and 25%,

respectively, in Europe. Celltrion’s partner, Pfizer, announced that 1Q sales of Remsima leapt 116.7%

y-y to USD78m. Remsima is called Inflectra in the US. Samsung Bioepis’s partner, Biogen, said 1Q

sales of Benepali skyrocketed 3,200% y-y to USD66m. Celltrion Healthcare launched Inflectra in the

US on Dec 5, 2016 and plan to release Rituxan biosimilar Truxima in Europe soon. Samsung Bioepis

is planning a US launch for Remicade biosimilar Flixabi (Renflexis in Korea) and an European

launch for Lantus biosimilar Lusduna. Accordingly, Korea’s biosimilar exports (including those of

Celltrion Healthcare and Samsung Bioepis) should exceed KRW1t in 2017.

Healthcare

2017. 6. 15

26

Pfizer (Hospira): Remsima/Inflectra quarterly sales Biogen: Benepali quarterly sales

Note: Pfizer (Hospira) has exclusive marketing rights for Remsima/

Inflectra in the US and some parts of Europe



Remsima/Inflectra: Market share in Europe Benepali: Market share in Europe

Note: Volume-based

Source: PR Newswire, Samsung Securities

Note: Volume-based

Source: PR Newswire, Samsung Securities

Celltrion Healthcare and Samsung Bioepis: Annual sales


3036

40

5561

78

0

10

20

30

40

50

60

70

80

90

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

(USDm)

1.8

15.4

30.7

52.7

65.3

0

10

20

30

40

50

60

70

1Q16 2Q16 3Q16 4Q16 1Q17

(USDm)

Remsima/Inflectra:

40%

Remicade:60%

Benepali:25%

Enbrel:75%

34 145 165

402

758

44

76

24

147

0100200300400500600700800900

1,000

2012 2013 2014 2015 2016

Celltrion Healthcare Samsung Bioepis

(KRWb)

Healthcare

2017. 6. 15

27

Korean medical-aesthetic firms penetrate global BTX and filler markets

Korean filler products dominant in China: The Chinese filler market was sized at an

estimated USD330m (up 65% y-y) in 2016. In the rapidly-growing market, Korean filler products

have taken firm root. LG Chem’s Yvoire sales in China hit USD37b (up 146.7% y-y) in 2016, which is

in the same ballpark as sales at major Chinese firms Bloomage Biotech (KRW51.6b; up 21.1% y-y)

and Shanghai Haohai (KRW32.8b; up 115% y-y). In sum, Yvoire sales in China grew more quickly

than sales of competing Chinese products. Meanwhile, Hugel’s and Medytox’s combined filler sales

(typically generated through parallel imports to China) leapt 102.9% to KRW107.6b in 2016, far

outstripping sales growth of Yvoire. In 1Q17, when the THAAD issue came to a head, LG Chem,

Medytox, and Hugel saw 1Q filler sales of KRW17b (up 77.1% y-y), KRW17.7b (up 31.5% y-y), and

KRW15.5b (up 60% y-y), respectively. Such strong growth for 1Q eased concerns over slowdowns in

top-line growth at those firms. We attribute the strength of Korean filler products in Asia to: 1)

superior pricing power compared to US and European products; and 2) high brand equity based on

the increasing global popularity of South Korean culture (commonly known as the Korean wave).

EM-bound BTX export growth solid: Korea’s BTX exports have grown explosively, led by

Hugel and Medytox, whose combined BTX sales rose 61.3% y-y to KRW126.1b in 2016 and 99.5% y-y

to KRW44.7b in 1Q17 thanks to strength in Southeast Asia, China, Latin America, and East Europe.

Korea’s customs-cleared BTX exports surged 116.2% y-y to USD7.99m in April, indicating that

Korea’s BTX export growth will remain solid y-y in 2Q. Considering that Allegan and Ipsen’s BTX

sales rose 12% and 35.8% y-y, respectively, in 1Q17, it is obvious that Korean firms’ market-share

gains are accelerating-led by strong growth of the global market and solid pricing and brand power.

Korean BTX product sales* Korean dermal filler product sales*

Note: * Sum of Hugel’s and Medytox’s BTX product sales


Note: * Sum of Hugel’s, Medytox’s, and LG Chemical’s (LG Life Sciences)

dermal filler product sales


15.6

20.5 19.7 22.4 22.4

29.1

35.6 39.1

44.7

0

10

20

30

40

50

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

(KRWb)

13.2

20.3

24.8

31.7 32.8

45.6

38.1

49.1 50.2

0

10

20

30

40

50

60

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

(KRWb)

Healthcare

2017. 6. 15

28

Korean firms to lead global biologics CMO and chemical-drug CMS markets

Global market for contracted manufacturing growing: The global market for chemical-

drug contract manufacturing services (CMS) is projected to grow at a 2015-2020 CAGR of 6.3% to

USD84b as pharmaceutical firms increasing outsource manufacturing as they strive to improve cost

competitiveness and amid rising demand for selective manufacturing technology. The global market

for biologics contract manufacturing organizations (CMOs) should grow at a 2015-2025 CAGR of 15.1%

to USD30.3b given the needs for capacity management, cost savings, risk control, rapid production,

and efficient use of resources.

Korea potentially home to a global top-ten CMS and the top CMO: SK Biotek entered the

CMS business in 1998 and was incorporated as an SK Group subsidiary in 2016 after being spun off

from SK Biopharmaceuticals in 2015. SK Biotek has accumulated a wide range of experience and

knowhow thanks to its group’s five decades of operating refineries and petrochemicals facilities. Of

note is the firm’s ability to meet customer demand for high-tech manufacturing, backed by its world-

class technology in continuous organic synthesis and systems that enable it to make over 50 types of

chemical synthesis technology. The firm’s factory in Daeduk has an annual production capacity of

158m cubic meters, while its factory in Sejong will open this year with a capacity of 318m cubic

meters, and this latter should rise to 798

m in 2020. Meanwhile, Samsung Biologics is Samsung Group’s biotech holding company established

in 2011 as a subsidiary of Samsung C&T and Samsung Electronics. Samsung Biologics is expanding

capacity efficiently by leveraging the group’s: 1) competitiveness in design, engineering, procurement,

construction, and validation (DEPC-V); and 2) ability to construct plant and install equipment

concurrently (based on its experience in the semiconductor industry). Swiss firm Lonza currently has

the world’s largest bio-CMO capacity at 259,000 liters, followed by Boehringer Ingelheim’s 241,000

liters and Samsung Biologics’ 182,000 liters. By 2018, however, Samsung Biologics should top the list

with 362,000 liters of capacity, followed by Boehringer Ingelheim’s 319,000 liters and Lonza’s

265,000 liters.

SK Biotek and Samsung Biologics pursuing ambitious 2020 targets: SK Biotek in 2016

posted sales of KRW97.1b (up 52.5% y-y) and an operating profit of KRW28.1b (up 80.1% y-y) for a

margin of 29% (up 4.4% pts y-y). The company’s 2020 vision is to become a global top-ten CMS

player with KRW1.5t in sales, KRW300b in operating profit, and an operating margin of 20%. IT will

pursue this by: 1) strengthening its competitiveness via domestic capacity expansions; and 2) seeking

M&A opportunities to rapidly secure capabilities. Samsung Biologics last year posted another

operating loss, this time to the tune of KRW30.4b on parent-based sales of KRW294.6b (up 337.3%

y-y). The company aims to be the world’s top bio-CMO player by 2020, with sales of KRW1t, an

operating profit of KRW400b, and an operating margin of 40%. The company currently has nine

CMO contracts totaling USD3.2b with six multinational pharmaceutical and biotechnology firms. It

is also negotiating with 15 such firms over around 30 biologics.

Healthcare

2017. 6. 15

29

SK Biotek: Company history

Date Event Note

1998 Enters drug manufacturing business

(drug intermediate)

Business based on in-house chemical and catalyst technology Commences manufacturing

(Plant #1 in 1999 and plants #2 and #3 in 2003)

2005 Enters API business Receives CMO order for BMS’s diabetes treatment

2013 Expands API business Wins regulatory approval in DMs (Japan in 2013, US in 2014, Europe in 2015)

2015 Spins off as SK Biotek CMS business spun off from SK Biopharmaceuticals

2016 Changes to holding structure; hikes capital SK Holdings acquires direct ownership Expands API plant capacity

Secures 23 customers, makes 40 products Sales of KRW101.2b in 2016 with KRW30.2b operating profit


Major CMS players

Company

Country

2015 CMS sales

(USDm)

2015 EBITDA

margin (%)

Product category

Core product

Area of business

1 Catalent US 1848 20 API, finished drug, distribution HPAPI, DP, soft gel US, Europe, Asia

2 DPx US 1705 n/a API, finished drug DP US, Europe, Asia

3 Lonza Switzerland 1623 26 API, finished drug HPAPI, DP, bio-API US, Europe, Asia

4 Aenova Germany 832 12 Finished drug DP US, Europe

5 Famar Greece 514 16 Finished drug DP Europe

6 Better Germany 501 n/a Finished drug DP US, Europe

7 Evonik Germany 470 21 Finished drug HPAPI US, Europe, China

8 Siegfried Switzerland 468 17 API, finished drug HPAPI, DP US, Europe, China

9 Cambrex US 434 30 API HPAPI US, Europe

10 Recipharm Sweden 406 15 API, finished drug HPAPI, DP Europe

Source: SK Biotek, Samsung Securities

SK Biotek: Sales and operating profit


51.9 60.7

68.2

78.9

101.2

4.3 4.8 7.5

20.9 30.2

0

5

10

15

20

25

30

35

0

20

40

60

80

100

120

2012 2013 2014 2015 2016

Sales (LHS) Operating profit (LHS) Operating margin (RHS)

(KRWb) (%)

Healthcare

2017. 6. 15

30

Global biologic CMO market outlook

Source: Frost & Sullivan

Manufacturing capacity of global players

Company 2016 2021E Capacity (L) 2016-2021E

rank rank 2016 2021E CAGR (%)

Roche 1 1 673,000 909,000 6.2

Lonza (CMO) 2 6 261,000 281,000 1.5

Boehringer Ingelheim (partial CMO) 3 3 241,000 338,000 7.0

Johnson & Johnson 4 9 230,000 230,000 0.0

Sanofi 5 7 223,000 243,000 1.7

Amgen 6 10 204,000 225,000 2.0

Biogen 7 4 196,000 316,000 10.0

Samsung (CMO) 8 2 182,000 362,000 14.7

Pfizer 9 149,000 149,000 0.0

Celltrion (partial CMO) 10 5 140,000 310,000 17.2

BMS 8 132,000 237,000 12.4

Novartis 125,000 205,000 10.4

Eli Lilly 137,000 137,000 0.0

Merck KGaA 120,000 120,000 0.0

Other* 1,291,000 2,106,000 10.3

Share of top-10 (%) 65.6 62.1

Total 3,754,000 5,557,000 8.2

Note: * Excludes top-10 capacity

Source: BioProcess Technology, Samsung Securities

4.6 5.5 6.5 7.8 9.3 11.1 12 14.216.9

20.224

2.7 3 3.23.5

44.3 4.2

4.75.2

5.7

6.4

7.38.5

9.711.3

13.315.4 16.2

18.9

22.1

25.9

30.4

0

5

10

15

20

25

30

35

2015 2017E 2019E 2021E 2023E 2025E

Mammalian Microbial

(USDb)

Mammalian: 2015 - 2025E CAGR of 18.0%Microbial: 2015 - 2025E CAGR of 9.0%

Healthcare

2017. 6. 15

31

Global biologic CMOs: Capacity comparison

Note: * Expected to start operations by 2019

Source: Company data, BioProcess Technology Consultants

Overview of Samsung Biologics’ manufacturing facilities

Plant #1 (2011-2013) Plant #2 (2013-2016) Plant #3 (2015-2018E)

Total capacity (L) 30,000 (6 x 5,000 L) 152,000 (10 x 15,000 L / 2 x 1,000 L) 180,000 (12 x 15,000 L)

Batches per year* 120 200 240 (estimate)

Annual production (L) 480,000 2,400,000 3,225,000

Capex (USDm) 300 650 740 (estimate)

Capex per unit production

volume (USD/L) 625 (benchmark**) 271 (43% of benchmark) 226 (36% of benchmark)

Construction 25 months to cGMP ready 29 months to cGMP ready 35 months to cGMP ready

Annual operation (days) 300 340 360

Cost competitiveness Industry average Industry-leading Industry-leading

Operation status Commenced ramp-up in Jul 2013

Commenced commercial operation in 2015

Commenced ramp-up in Mar 2016

Commenced commercial operation in 2017

Under construction

(expected to complete by 2017)

US FDA approval status First approval in Dec 2015 Inspection expected in 2H17 Undecided

EMA approval status First approval in Sep 2016 Inspection expected in 2H17 Undecided

Note Batch success rate of 99% in 2015

6 bioreactors to 1 filtration processing

Reduced periodical down-time

10 bioreactor to 1 filtration processing

N-1 perfusion convertible technology

12 bioreactor to 1 filtration processing

Note: * Based on maximum annual batch production. Batch is a unit equivalent to the amount produced from a single bioreactor

** Industry average

Source: Company data

30

259 241197152

180

0

50

100

150

200

250

300

350

400

Samsung Biologics (2018E) Lonza (2015) Boehringer Ingelheim (2015) Others (2015)

('000 liters)

Plant #3*

Plant #2 (2015)

Plant #1

Healthcare

2017. 6. 15

32


Firms with R&D or B2B deals with multinationals warrant attention

Uncertainties to ease in 2H: As stated, Hanmi Pharmaceutical, Medytox, and Seegene gained

global recognition over 2013-2016 for their out-licensing and ODM supply contracts with global

pharmaceutical companies. Yet, slow R&D progress by the global firms and delays in ODM

shipments have raised concerns over contract cancellations. In 2H, we expect Hanmi and Medytox to

move to the next phase of development and Seegene to start ODM shipments. Indeed, expectations

should supplant concerns and lead to the market to reevaluate Korean firms’ R&D capabilities.

Multiple drugs up for US, European approval: Samsung Bioepis and Celltrion filed for FDA

and EMA approval of multiple biosimilars in 2016 and expect to obtain them in 2H. Also in 2H: 1)

Green Cross should reapply for US approval of its immunodeficiency drug IVIG, which was shelved

in 2016 after an FDA review; and 2) SK Biopharmaceuticals plans to file for US approval of its

epilepsy drug Cenobamate and sleep disorder drug SKL-N05/JZP-110.

R&D to regain momentum, influence shares: Sentiment on the healthcare sector soured in

late 2016 on the cancellation or revision of some of Hanmi’s out-licensing contracts, and investors

lost interest in the sector in 1H17 for a lack of R&D momentum. In 2H17, however, the sector should

show visible R&D progress, resume ODM shipments, and receive US and European approvals for

multiple drugs, boosting sentiment and making R&D a key share-price determinant once again.

Contents


p2


p7


p32


p52



p87

Company p105

Healthcare

2017. 6. 15

33

Samsung healthcare coverage: B2B and R&D outlook (1)

Category Company 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

Large

pharmas

Green Cross

Submit BLA for

IVIG to US FDA;

Start Korea Phase

III of Hepabig

Receive

approval for

IVIG in US

Launch IVIG

in US

Start global

Phase I of

MG1113A

Yuhan

Hanmi

Pharmaceutical

Start global

Phase I of

JNJ-64565111

Start global Phase

III of Efpeglenatide

Release results

of HM71224

global Phase II

Release results

of Rolontis

US Phase III

Submit BLA

for Rolontis to

US FDA

Chong Kun Dang

Pharmaceutical

Donga ST

Finalize Europe

Phase I of CKD-

506

Finalize US Phase

I of CKD-504

Finalize

Australia Phase

II of CKD-519

Finalize Korea

Phase I of

CKD-581

SK Chemicals Finalize US Phase

I of DA-1241

Finalize Europe

Phase I of

DA-8010

Finalize US Phase I

of DA-1229 (NASH)

SMEs

Boryung

Pharmaceutical

Start exporting

Kanarb to Russia

Start exporting

Kanarb to two

Southeast Asian

countries

Start exporting

Kanarb to three

Southeast Asian

countries

Ilyang

Pharmaceutical

Submit IND for

Supect’s Phase III

in China

Start China

Phase III of

Supect

Start exporting

Noltec and

Supect to

Middle East

Submit IND for

anti-virus

treatment

(IY7640)

overseas

Phase I

Start exporting

Noltec to Ecuador

Add H.

pylori as

indication

for Noltec

Daewon

Pharmaceutical

Add fever as

indication for

Pelubi

Renew certification

to export to China

ST Pharm

Sign contract

with Gilead

Sciences to

supply API for

hepatitis

C drugs

Sign contract to

supply API for

oligonucleotide

drug; test operation

of new plant

Biotech

Samsung

Biologics

Received FDA

approval for

Remicade

biosimilar

Receive

approval for

Humira

biosimilar

in Europe

Receive approval

for Herceptin

biosimilar in

Europe

Receive

approval for

Humira

biosimilar in US

Receive approval

for Lantus

biosimilar in US

Celltrion

Receive approval

for Herceptin

biosimilar in Europe

Receive

approval for

Herceptin

biosimilar in US

Other

pharmaceutical

arms of

conglomerates

SK

Biopharmaceutical

Released Phase

III results of SKL-

N05/JZP-110;

release results of

Cenobamate

Phase III

Submit NDA for

SKL-N05/JZP-

110 and

Cenobamate

in US

Receive approval

for SKL-N05/JZP-

110 and

Cenobamate

Kolon Life

Science

Receive approval

for Invossa in

Korea

Launch Invossa in

Korea

Source: Samsung Securities estimates

Healthcare

2017. 6. 15

34

Samsung healthcare coverage: B2B and R&D outlook (2)

Category Company 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

Diagnostics

Seegene

Signed a co-

development

contract with

ThermoFisher

Start ODM supply

to Beckman Coulter

Receive approval

for ‘Project 100’ in

Europe

Start ODM

supply to

Qiagen

i-Sense

Receive approval

for manufacturing

site and products

in China

Boditech Med

Signed a contract

with McKesson to

supply colon

cancer diagnostic

kits

Medical

devices

Osstem Implant

Dio

Dentium

Receive approval

for manufacturing

site in China

Vieworks Launch new

dynamic detector

Value Added

Technology

Receive approval

for Green Smart

in China

Rayence Launch veterinary

imaging system

Medical

aesthetics

Medytox Start global Phase

III of Innotox

Hugel

Receive inflow of

funds from Bain

Capital

Receive approval

for dermal filler

products from

China


Healthcare

2017. 6. 15

35

Hanmi Pharmaceutical: Sector leader to make R&D progress

Boasts out-licensing contracts worth KRW6.5t: Hanmi Pharmaceutical has a number of

exceptional out-licensing contracts, including ones worth: 1) USD690m (USD50m upfront;

USD640m in milestones) with Eli Lilly for BTK inhibitor-based autoimmune treatment HM71224; 2)

EUR2.92b (EUR0.2b; EUR2.72b) with Sanofi for long-acting GLP-1 diabetes treatment known as the

Quantum Project; 3) USD915m (USD105m; USD810m) with Johnson & Johnson for long-acting

GLP-1/Oxynotomduline diabetes/obesity treatment HM12525A/JNJ-64565111; 4) USD910m

(USD80m; USD830m) with Genentech for RAF inhibitor-based cancer treatment HM95573; 5)

undisclosed amounts with Spectrum (end-Jan 2012) for long-acting neutropenia treatment Rolonits

TM (LAPS-GCSF, eflapegrastim) and pan-HER cancer treatment poziotinib (Mar 2015); and 6) an

undisclosed amount with Zai Lab in for the marketing rights in China, Hong Kong, and Taiwan for

EGFR inhibitor-based lung cancer treatment HM61713/ZL-2303 (olmutinib; Nov 2015).

Five clinical trials underway

• Spectrum in Sep 2014 started US Phase III trials for Rolonits on 580 cancer patients that

developed neutropenia due to chemotherapy, with completion targeted for Oct 2018. If proven

effective, the once-every-three-week treatment has potential to take over the KRW6t global

neutropenia treatment market from Neulasta’s blockbuster PEG-GCSF, which requires once-a-

week dosing.

• Safety concerns over HM61713 (olmutinib) emerged after Boehringer Ingelheim on Sep 30, 2016

cancelled its out-licensing deal for the drug. That said, Hanmi on Apr 13 of this year obtained

investigational IND approval in Korea to conduct Phase III trials for the drug on EGFR-mutant

lung cancer patients. On Feb 2, 2017, Zai Lab filed for IND approval to perform Phase I trials in

China for ZL-2303 (olmutinib).

• Eli Lilly on Sep 10, 2016 initiated Phase II multinational trials for HM71224 on 182 rheumatoid

arthritis patients. The trials should complete in Jun 2018.

• Spectrum on Mar 8, 2016 began Phase II US trials for poziotinib on 70 breast cancer patients

showing resistance to existing therapies.

• Hanmi on Mar 20, 2017 entered Phase I domestic trials for HM95773 on 100 patients with solid

tumors harboring BRAF, KRAS, or NRAS mutations.

Global clinical trials to resume for LAPScovery biologics: Johnson & Johnson at end-Nov

2016 posted on the US NIH site clinicaltrials.gov that it suspended recruitment of patients for the

Phase I clinical trials for HM12525A/JNJ-64565111. Hanmi at end-Dec 2016 revealed revisions to its

out-licensing contract with Sanofi for three new diabetes treatments known as the Quantum Project.

Specifically, Sanofi will: 1) return the rights to LAPS-Insulin, a once-a-week insulin analog; 2) reduce

milestone payments for efpeglenatide (a once- or twice-monthly GLP-1 analog) and have Hanmi

share development costs (25% of Sanofi’s R&D costs with a cap of EUR150m); and 3) maintain its

contract for LAPS-Insulin Combo—a combination of LAPS-Insulin and efpeglenatide—and retain

rights to acquire the combination drug after development by Hanmi. Having taken back the rights to

LAPS-Insulin and accepting responsibility for delays in clinical sample production, Hanmi agreed to

return EUR196m of its upfront payment of EUR400m, while additional milestones will shrink from

EUR3.5b to EUR2.7b. HM12525A/JNJ-64565111 is a combination of LAPS-GLP-1 and LAPS-

Oxyntomodulin while efpeglenatide is LAPS-Exendin. Both are biologics based on LAPScovery long-

acting platform technology.

Healthcare

2017. 6. 15

36

The suspension of Phase I trials for HM12525A/JNJ-64565111 and revisions to the out-licensing

contract for the Quantum Project have raised doubts over the commercialization prospects of

LAPScovery drugs. Yet, Sanofi during an Apr 28 earnings call said it will begin Phase III clinical trials

for efpeglenatide in 4Q17, following through on remarks made during its 4Q16 earnings call that the

trials would start this year. The company also says efpeglenatide is a top-10 drug (slated for Phase III

trials) in its pipeline. RolontisTM, undergoing Phase III trials in the US, is also a LAPScovery-based

biologic.

Hanmi plans to invest KRW257.3b to complete a second bio plant in Pyeongtaek, with this one

dedicated to making LAPScovery-based biologics for clinical trials, regulatory approval, and

commercial production. Meanwhile, at the JP Morgan Healthcare Conference in January, the

company unveiled an enzyme replacement therapy for rare diseases that employs LAPScovery long-

action solution. The treatment is in preclinical phases, reconfirming LAPScovery’s commercial

potential and scalability. In interviews with local press on Feb 13 and May 10, Hanmi’s CEO said

sample shipments for efpeglenatide and HM12525A/JNJ-64565111 will begin soon, and added that

that Hanmi was working with Sanofi and Johnson & Johnson to test and fine-tune the facilities to

ensure they meet US FDA requirements, which was a reason behind sample production delays. We

believe it is time to focus on prospects of efpeglenatide and HM12525A/JNJ-64565111 resuming

global clinical trials and generating milestone income.

Healthcare

2017. 6. 15

37

Sanofi: Global Phase III clinical trials of efpeglenatide


Sanofi: Efpeglenatide part of key pipeline projects in Phase III studies underway or expected to start this year


Hanmi Group: Combined market cap and key events

Note: Deals converted to KRW based on forex rates on dates of announcement; upfront payments and milestone revenue deducted as received

Source: QuantiWise, Bloomberg, company data

0

4,000

8,000

12,000

16,000

20,000

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17

Combined market caps of Hanmi Pharm and Hanmi Science (LHS) Remaining contract amount (RHS)

(KRWb)

Mar 19, 2015Out-licensed HM71224 to

Eli Lilly

Jul 28, 2015Out-licensed HM61713 to Boehringer

Ingelheim

Nov 5, 2015Out-licensed

Quantum project to Sanofi

Nov 9, 2015Out-licensed HM12525A to Janssen

Nov 23, 2015Out-licensed HM61713 to ZAI Lab

Sep 29, 2016Out-licensed HM95573 to Genentech

Sep 30, 2016Boehringer Ingelheim terminated HM61713 contract

Dec 29, 2016Changed out-licensing contract with Sanofi on LAPS-Insulin

Healthcare

2017. 6. 15

38

Hanmi Pharmaceutical: R&D pipeline

Category

Project

Indication

Pre-

clinical

Phase

l

Phase

ll

Phase

lll

Remarks

Biologic

LAPS Exendin4 (efpeglenatide) Diabetes, obesity Quantum Project, out-licensed to Sanofi

LAPS Insulin Combo (HM14220) Diabetes, obesity

LAPS Insulin115 (HM12470) Diabetes

LAPS GCSF (Rolontis, eflapegrastim) Neutropenia Out-licensed to Spectrum Pharmaceuticals

LAPS hGH (efpegsomatropin) Growth hormone deficiency

LAPS GLP/GCG (HM12525A) Diabetes, obesity Out-licensed to Janssen (Johnson & Johnson)

LAPS Triple Agonist (HM15211) Obesity Developed by Bejing Hanmi

LAPS GCG Analog (HM15136) Congenital hyperinsulinism Applied LAPScovery

LAPS IDS (HM15410) Mucopoysaccharidosis Applied LAPScovery

LAPS GLP-2 Analog (HM15410) Short bowel syndrome Applied LAPScovery

HM21001 GMB stem cell therapy Co-developing with Ajou University

BH2950 Breast/gastric cancer Developed by Bejing Hanmi

BH2922 NSCLC/colorectal cancer Developed by Bejing Hanmi

BH2941 Cancer Developed by Bejing Hanmi

New

chemical

Poziotinib (HM781-36B) Breast cancer Out-licensed to Spectrum Pharmaceuticals

and Luye Pharma in China

Olmutinib (HM61713) NSCLC Out-licensed to ZaiLab in China

Luminate Retinal diseases Licensed in from US bio venture Allegro

Oraxol Gastric cancer Out-licensed to Athenex

HM71224 Rheumatoid arthritis Out-licensed to Eli Lilly

HM95573 Solid cancer Out-licensed to Genentech

KX2-391 Solid cancer Licensed-in from Athenex

Oratecan Solid cancer Out-licensed to Athenex

HM43239 Acute myeloid leukemia

Incrementally

modified or

fixed-dose

combination

HGP1207 Pulmonary hypertension

HCP1105 Non-HDL decline of patients

with combined dyslipidemia

HCP1305 Hypertension/dyslipidemia

HCP1401 Hypertension

HCP1303 Prostatic hyperplasia,

erectile dysfunction

HCP1405 Osteoporosis

HCP1202 COPD

HIP1302 Anti-virus

HIP1503 Overactive bladder


Healthcare

2017. 6. 15

39

Samsung Biologics: Biotech leader to win more CMO contracts, biosimilar approvals

To become world’s largest bio CMO: Samsung Biologics currently operates two plants—with

capacities of 30,000 and 152,000 liters—and is building a third one with a capacity of 180,000 liters.

The #3 plant is 75% complete and should finish in 4Q17, with the validation process to wrap up v in

4Q18. On completion the company will be the world’s largest bio CMO in terms of capacity. The firm

expects to break even on an operating basis in 2017 on y-y sales growth of 50% to KRW441.9b

backed utilization rates of 100% and 40% at its #1 and #2 plants, respectively. In 2016 utilization

rates at those facilities were a respective 100% and 20%.

More CMO deals on the horizon: Samsung Biologics has a CMO order backlog of USD3.2b

(including a KRW47.1b deal signed with a European firm on May 4) and is in talks with more than 15

foreign pharmaceutical players for over 30 CMO contracts. Considering construction of the third

plant should complete this year, the firm is likely to pursue even more CMO contracts.

Boasts four approved biosimilars in developed markets: Subsidiary Samsung Bioepis

obtained approval from the EMA in: 1) Jan 2016 for Benepali, the world’s first Enbrel biosimilar; 2)

May 2016 for Flixabi, the second-ever Remicade biosimilar; and 3) January for Lusduna, the second-

ever Lantus biosimilar. After last week’s approval for Renflexis, the firm now boasts the largest

biosimilar lineup with US FDA and/or EMA approval.

The more biosimilars up for approval: Samsung Bioepis filed for US FDA approval of Lantus

biosimilar Lusduna in Aug 2016, and for EMA approval of a Humira biosimilar in Jul 2016 and a

Herceptin biosimilar in Oct 2016. The subsidiary should file for US approval of the latter two this

year. The company’s lineup of approved biosimilars by end-year should include Benepali, Flixabi,

Lusduna, Humira, and Herceptin in Europe and Renflexis and Lusduna in the US.

Biogen during its 1Q earnings call said that combined European sales of Benepali and Flixabi rose

3,527.8% y-y and 23.9% q-q to USD65.3m. Benepali, available in 16 countries, has been taken by

more than 40,000 patients while Flixabi is sold in seven countries. PR Newswire on May 4 reported

that Benepali captured a 25% market share in Europe.

Healthcare

2017. 6. 15

40

Europe: Biosimilars of major drugs, by company

Humira Remicade Enbrel Lantus Avastin Herceptin Neulasta Rituxan

Filed

(May 2016)

Launched

(Aug 2016)

Launched

(Feb 2016)

Approved

(Jan 2017)

Phase III

(Mar 2015)

Filed

(Oct 2016)

Pre-clinical

Launched

(Feb 2015) Pre-clinical Pre-clinical

Filed

(Nov 2016)

Approved

(Feb 2017)

Phase III

(Top-line results

released Jan 2017)

Phase III

(Data released

Nov 2015)

Filed

(Nov 2016)

Approved

(Mar 2017)

Phase III

(Oct 2016)

Filed

(Dec 2016)

Phase III

(Top-line results

released Jul 2016)

Phase III

(May 2016)

Filed

(May 2017)

Filed*

(May 2017)

Filed

(EMA CHMP

recommendation

Apr 2017)

Filed

(Mar 2016)

Filed

(EMA CHMP

recommendation

Apr 2017)

Launched

(Sep 2015)

Phase III

(May 2015) Pre-clinical

Filed

(Nov 2016) Phase I

Filed

(Aug 2016)

Filed

(Jul 2016)

Phase III

(Top-line results

released Jan 2017)

Phase III*

(Top-line results

released Sep 2016)

Phase III

(Feb 2015)

Phase III

(Feb 2014) Phase I

Phase III

(Sep 2014)

Filed

(Jan 2017)

Launched**

(Sep 2015)

Phase III

(Jul 2015)

Note: * Sandoz acquired EEA rights from Pfizer in 1Q16

** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar


US: Biosimilars of major drugs, by company


Completed

clinical trials

Approved

(Apr 2017)

Completed

clinical trials

Filed

(May 2016)

Phase III

(Mar 2015)

Completed

clinical trials

Pre-clinical

Launched

(Dec 2016) Pre-clinical Pre-clinical

Completed

clinical trials

Completed

clinical trials

Phase III

(Top-line results

released Jan 2017)

Phase III

(Data released

Nov 2015)

Filed

(Aug 2016)

Approved

(Sep 2016)

Phase III

(Oct 2016)

Filed

(Nov 2016)

Phase III

(Top-line results

released Jul 2016)

Phase III

(May 2016)

Phase III

(Dec 2013)

Phase III*

(Top-line results

released Sep 2016)

Approved

(Aug 2016)

Filed**

(Nov 2015)

Completed

clinical trials

Launched

(Dec 2016)

Phase III


Filed

(Nov 2016) Phase I

Filed

(Nov 2016)

Completed

clinical trials

Phase III

(Top-line results

released Jan 2017)

Phase III*

(Top-line results

released Sep 2016)

Phase III

(Feb 2015)

Phase III

(Feb 2014) Phase I

Phase III

(Sep 2014)

Filed

(Jan 2017)

Launched***

(Dec 2016)

Phase III

(Jul 2015)


** US FDA issued Sandoz with a complete response letter for its Neulasta biosimilar in Jul 2016

*** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar


Healthcare

2017. 6. 15

41

Biogen: Benepali and Flixabi sales


1.8 15.4

30.7

52.7

65.3 0.1

0.1

0.6

0

10

20

30

40

50

60

70

1Q16 2Q16 3Q16 4Q16 1Q17

Benepali Flixabi

(USDm)

Healthcare

2017. 6. 15

42

Medytox: Medical aesthetics leader to start Phase III trials for Innotox

Concerns have mounted over a lengthy delay to the start of Phase III trials for Medytox’s Innotox,

which were scheduled to commence in 4Q15. One reason behind the delay was Allergan’s Jan 2016

acquisition of next-generation BTX developer Anterios for an upfront payment of USD90m. Allergan,

during its 2Q16 earnings release, said it planned to submit an IND application to initiate Phase III

clinical trials for Innotox by end-2016, but has shown little progress thus far.

Medytox attributes the delay to an unexpectedly long validation process for its #2 plant in addition to

clinical material production issues. Many market watchers, however, believe Allergan is trying to

curb competition by acquiring and keeping next-generation BTX product candidates—such as

Innotox and Anterios’s topical BTX ANT-1207—in the development stage, noting the US firm’s Botox

controls 76% of the global BTX market. Recent developments at a rival, however, may force a change

in strategy.

Ipsen in 2013 conducted Phase II clinical trials for its liquid BTX—Dysport Next Generation (DNG)—

on 176 glabellar lines patients and Phase III clinical trials on 333 cervical dystonia patients, with both

trials producing positive results (released in Feb 2014) in terms of safety and efficacy. DNG was

superior to a placebo in both studies, comparable to Dysport in the first one, and regarded as a

success by the market in the latter. Yet, the firm delaying an application for DNG to treat cervical

dystonia has investors kept investors skeptical over the product’s commercial value.

Nonetheless, we believe Ipsen plans to commercialize DNG based on: 1) its purchase of Galderma’s

patent for liquid BTX, which began US Phase II clinical trials in 2014; and 2) the results of Phase III

trials for DNG in Europe where its efficacy and safety were respectively proven on trials on 184 and

600 patients that ended in Sep 2015 and Dec 2016. Ipsen on May 11 said it plans to apply for DNG’s

approval in Europe in 2H, implying that the product’s Phase III trials were successful. The firm

forecasts that DNG will be approved by the EMA as a treatment for glabellar lines in 2018 and

cervical dystonia in 2019.

All things considered, we expect Allergan to submit an IND application to initiate Phase III clinical

trials for Innotox in 3Q17. On submission, Medytox should receive related milestones of USD25m

and see its P/E fall from 36x to 27.9x. We estimate Innotox is worth KRW1.056t and will launch

commercially in 2020.

Healthcare

2017. 6. 15

43

Ipsen: Major R&D pipeline

Note: As of May 2017; based on Ipsen IR material


Medytox: Innotox value

(KRWb) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2028E

Development schedule

Phase III

starts

Phase III

ends

Approval Launch

Global BTX market (USDb) 3.9 4.2 4.6 5.1 5.5 5.8 6.2 6.5 6.8 7.9

Market growth (%) 8.4 9.7 9.7 8.9 8.0 7.0 6.0 5.0 5.0 5.0

Market share* (%) 2 4 6 8 10 10 10

Innotox global sales (USDm) 101 219 351 496 651 684 791

Upfront fees and milestones (USDm) 25 35 42 184

Manufacturing profits** (USDm) 40 87 140 198 260 273 317

Royalties (USDm) 7 15 25 35 46 48 55

Total sales recognized by Medytox (USDm) 25 35 42 48 103 349 233 306 321 372

KRW-converted sales*** 30.0 42.0 49.8 57.1 123.3 418.8 279.8 367.2 385.6 446.3

EBIT*** 30.0 42.0 49.8 47.4 102.3 385.1 232.2 304.7 319.9 370.4

Free cash flow*** 24.0 33.6 39.8 37.9 81.9 308.0 185.7 243.8 255.9 296.3

Present value interest factor*** 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4

Present value 22.1 28.5 31.1 27.3 54.2 187.9 104.3 126.1 121.9 110.2

Net present value 1,045.2 Terminal value*** 1,075.3 NPV+TV 2,120.6 Fair value**** 1,056.0 Outstanding shares (‘000) 5,657 Fair value per share 186,694 Note: * Assumes market share peaks at 10% five years after launch and stays flat thereafter

** Assumes Medytox supplies Allergan at 40% of retail price

*** Assumes KRW1,200/USD, 80% EBIT margin, 20% tax rate, 8.6% WACC, -1.5% terminal growth

**** Assumes Phase III success rate of 49.8%

Source: UBS Pharmaceutical Handbook, Samsung Securities estimates

Healthcare

2017. 6. 15

44

Seegene: Diagnostics leader to start ODM shipments to Beckman Coulter

Holds ODM contracts with global players: Seegene inked ODM contracts for molecular

diagnostic kits with global: 1) number-three in-vitro diagnostic firm Beckman Coulter in Nov 2014: 2)

number-three molecular diagnostic player Qiagen (with a market share of 11.6%) in Jul 2015; 3)

number-four molecular diagnostics supplier Becton Dickinson (9.2%) in Sep 2015; and 4) number-

two molecular diagnostic firm Hologic (14.4%) in Nov 2016. The company plans to develop and

supply molecular diagnostic assays (based on MuDT technology capable of simultaneous detection of

multiple targets) exclusively designed for its global partners’ automated gene diagnosis and analysis

platforms, including Beckman Coulter VERIS MDx System, Qiagen QIAsymphony RGQ MDx,

Becton Dickinson BD MAX System, and Hologic Panther Fusion.

Shipments to start from 2017: Seegene should complete development and approval processes—

which take around two or three years—with: 1) Beckman Coulter by 3Q17 and commence shipments

from 4Q17; 2) Qiagen and Becton Dickinson by end-2017 and begin supplying from 2H18; and 3)

Hologic in 2018 and ship from 2H19. Each contract is projected to generate sales of KRW5b in the

first 12-months of supply, with full-year total projected to reach KRW30b-50b thereafter. The deals

should help Seegene accelerate sales growth of molecular diagnostics assays, expand its global sales

network, capitalize on global partners’ automated gene diagnosis and analysis platforms, and boost

brand equity.

Project 100 targets Europe CE certification by 2018: Seegene is running the gamut on an

automated assay development system, taking care of development, clinical trials, regulatory filing,

manufacturing, and quality control. The company can develop multiplex molecular detection assays

within two months. The firm’s Project 100, a one-platform multiple molecular diagnostics solution,

targets the development of 95 new assays—eg, 54 to detect infectious diseases, 21 for oncology, 12 for

drug resistance, and 8 for genetic diseases. The firm plans to file for Europe CE certification for all 95

products and expects approval next year, after which it will approach key doctors in each nation to

jointly develop and market the items. The project aims to open new markets and secure a fresh

customer base.

Global in-vitro diagnostics market

Rank Company Market share (%) 1 Roche Diagnostics 18.3

2 Siemens Healthcare 10.4

3 Danaher (Beckman Coulter) 10.3

4 Abbott 9.5

5 Thermo Fisher 6.2

6 Becton Dickinson 5.4

7 Alere 4.5

8 Sysmex 3.7

9 bioMerieux 3.6

10 Ortho Clinical Diagnostics 1.8

Others 26.3

Source: Evaluate MedTech (2015); Analysis of the Global In Vitro Diagnostics

Market, Frost & Sullivan (2014)

Global molecular diagnostics market

Rank Company Market share (%)

1 Roche Diagnostics 25.2

2 Hologic 14.4

3 Qiagen 11.6

4 Becton Dickinson 9.2

5 Abbott 8.4

6 Cepheid 5.5

7 Siemens Healthcare 5.2

Others 20.5

Source: Evaluate MedTech (2015); Analysis of the Global In Vitro Diagnostics

Market, Frost & Sullivan (2014)

Healthcare

2017. 6. 15

45

ST Pharm: To win more CMO contracts and expand capacity

Gilead to keep suffering from falling hepatitis C drug sales: Sales of Gilead’s blockbuster

hepatitis C drugs declined 40% y-y and 20% q-q to USD2.57b in 1Q17, with those from countries

other than the US and Europe sliding 71.5% y-y and 30.7% q-q to USD401m. ST Pharm supplies the

API for Gilead’s hepatitis C treatments in countries other than the US and Europe. Gilead set its 2017

hepatitis C drug sales guidance at USD7.5b-9b (down 35-49% y-y). Bloomberg consensus has such

sales falling 43% y-y to USD8.44b in 2017 and 22.7% y-y to USD6.55b in 2018. Yet, we do not believe

such drops in sales will hurt API orders much in the near term, as the APIs account for a minimal

portion of the price. In addition, Gilead’s recently launched Epclusa should become available in more

countries, and its new hepatitis C drugs (SOF/VEL/VOX) are likely to be approved in 2H17 by the US

FDA—more reasons backing our view that ST Pharm’s API sales are unlikely to plunge this year.

Even so, we conservatively estimate that the Korean firm’s related API sales will only increase 2.1% y-

y in 2017—as some of the 135m shipments to Gilead scheduled for this year should be deferred to

next year—and decline 15% y-y in 2018.

Oligonucleotide plant to start pilot production in 2018, commercial in 2019: ST Pharm

in Dec 2016 said it would invest KRW33b to build a new factory dedicated to oligonucleotides that

will expand its capacity for the API by five times. The new facility should complete and start pilot

production in 1H18, and then validate and start commercial production in 1H19. The company

should see more orders and add clients as its capacity expands, demand for clinical trials for

oligonucleotide-based treatments increases, and existing client enters Phase III clinical trials. We

expect the firm’s oligonucleotide sales to grow to KRW31b in 2017 (15% of total sales) and KRW55b

in 2018 (25.4%) from KRW10.4b in 2015 (7.5%) and KRW20.6b in 2016 (10.3%). The firm should

see its sales dependence on the API for hepatitis C drugs fall and sales of high-margin oligonucleotide

rise.

Gilead Sciences: Sales guidance of HCV treatment in 2017


Healthcare

2017. 6. 15

46

SK Biopharmaceuticals: Chaebol arm finding R&D success

Plans to build new drug candidate into a business: SK Biopharmaceuticals is dedicated to

developing drugs to treat central nervous system (CNS) disorders. The company envisions: 1)

discovering new drug candidates that address unmet medical needs; 2) carrying out global clinical

development through its organization in the US; and 3) selling its products directly, unlike most of its

domestic peers that opt for out-licensing contracts. The new drugs, if successful, should boost both

the firm’s top and bottom lines. SK Bio aims to become the world leader in epilepsy treatments by

2020 and a global top-50 pharmaceutical player by 2025.

To file for FDA approval of Cenobamate in 2017: Epilepsy is a result of excessive and

abnormal nerve cell activity in the brain cortex. Datamonitor predicts that the seven major epilepsy

treatment markets (US, France, Germany, Italy, Spain, UK, Japan) will see a 2.3% CAGR from

USD4.5b in 2013 to USD5.5b in 2022. Among epilepsy patients, approximately 59% experience

partial seizures, 27% generalized seizures, and 14% status epilepticus. Up to 30-40% of patients are

unresponsive to treatment consisting of a combination of two or three drugs—eg, it is an unmet

medical need. UCB/Daiichi Sankyo’s Vimpat (lacosamide) is currently leading the epilepsy treatment

market, and its sales in the seven major markets are projected to grow from USD829m in 2016 to

USD13.9m in 2021 before shrinking to USD493m in 2022 (on patent expiry in 2021). Clinical tests

over 2007-2010 demonstrated that Vimpat reduces seizure frequency by 19%pts and improves the

percentage of seizure-free patients by 2%pts, both figures vs those of a placebo. Cenobamate bettered

the performance of a placebo by a respective 34%pts and 19%pts in Phase IIa clinical trials (6-week

duration) and 31%pts and 10%pts in Phase IIb clinical trials (12-week duration). In other words,

Cenobamate has potential to be a best-in-class drug. The drug in 1Q16 started Phase III trials in 19

countries (including in the US) as an adjunctive therapy for 1,100 epilepsy patients with partial

seizures. The FDA only requires safety data from the Phase III study, saying Cenobamate proved its

effectiveness in the Phase II study. As an open-label study (in which participants know which

treatment is being administered) aimed at verifying the drug’s long-term safety, it has greater

probability of success than do regular Phase III studies. SK Bio plans to hold a pre-NDA meeting with

the FDA in 2Q and file for approval for use as an adjunctive therapy in 4Q. If commercialized,

Cenobamate would have a dosage of 200mg once a day. In the longer term, the company plans to

expand indications of the epilepsy drug to include sole therapy for partial seizures, generalized

seizures, and rare seizures. Given its clinical superiority, Cenobamate is likely to be priced higher

than Vimpat is. The firm intends to establish a dedicated marketing organization, recruit talent, and

decide whether to sell directly or through partners boasting established distribution networks.

Cenobamate worth an estimated KRW1.569t: Our estimate of Cenobamate’s value assumes

a won/dollar rate of KRW1,200, an EBIT margin of 50%, a tax rate of 22.5%, a WACC of 10%,

earnings persistence coefficient of 90%, probability of success of 87.9%, a 2018 approval, and 2019

launch. The company hopes the drug will generate annual sales of KRW1t and operating profit of

more than KRW500b. Considering Cenobamate outperformed leading epilepsy drug Vimpat in

clinical trials, we value the drug at KRW1.57t and expect its sales and operating profit to reach a

respective KRW1.08t and KRW540b in 2026.

Healthcare

2017. 6. 15

47

SKL-N05/JZP-110 to seek FDA approval this year: SK Bio licensed out sleep disorder drug

SKL-N05/JZP-110 to Jazz Pharmaceutical (US) for non-Asian markets in 2011. We expect the drug

to become a best-in-class one as it is six times more effective than a placebo is while Xyrem (the

world’s top drug for narcolepsy) is just twice as effective (vs a placebo). Jazz Pharmaceutical on Mar

20 said it completed Phase III TONES 3 and TONES 4 trials on 652 sleep apnea patients, and on Apr

26 announced it finished Phase III TONE 2 trials on 240 narcolepsy patients. Patients taking 300mg

or 150mg doses of SKL-N05/JZP-110 three times a day showed a statistically significant advantage in

the maintenance of wakefulness test and Epworth sleepiness scale over those taking a placebo

(although 75mg dosing three times a day failed to show statistically significant advantage the latter).

Side effects included headaches, nausea, a lack of appetite, nasopharyngitis, dry mouth, and anxiety.

Two patients suffered severe reactions, but this proved to have little to do with the therapy. Jazz

Pharmaceutical plans to announce the clinical results at the Jun 3-7 annual meeting of the Associated

Professional Sleep Societies LLC, and apply for FDA approval of the drug as a sleep apnea and

narcolepsy treatment in 4Q.

SKL-N05/JZP-110’s value estimated at KRW224.6b: Our calculation of the value of SKL-

N05/JZP-110 assumes a won/dollar rate of KRW1,200, an EBIT margin of 90%, a tax rate of 22.5%,

a WACC of 10%, earnings persistence coefficient of 90%, probability of success of 87.9%, a 2018

approval, and 2019 release. Assuming maximum market share of 15% in 2023, we estimate SKL-

N05/JZP-110’s value at KRW224.6b.

SK Biopharmaceuticals: Global networks

Korea (Pangyo) US (New Jersey) China (Shanghai) Total

No. of employees 113 39 4 156

Note

Research and pre-clinical

trials Partnerships and

clinical trials in Asia

Global clinical trials

Commercialization of

drugs under SK brand

Manage business and

partnering in China R&D staff: 111


SK Biopharmaceuticals: Growth plan


202520202016

Emerging

pharma

� Continue to launch new drugs for

nerve/menta l disorders

� Enter potential therapeutic areas such

as cancer

� Self-development and open innovation

for new drugs

� Enter Europe and Asia in addition to US

Global

top 50

� To commercialize its Cenobamate

and make it best in class

� Non-organic growth in epilepsy drug

business

� Establish epilepsy drug portfolio

� Continue to develop next-generation

drugs for epilepsy

To lead

global

epilepsy

drug

market

Healthcare

2017. 6. 15

48

Characteristics of epilepsy market

Feature Note

US the biggest market US market accounts for 67% of global epilepsy market; relatively less regulation on drug prices in US

(prices in US are 3x those in Europe and 5x those in Korea)

Huge unmet needs Combination therapies are prevalent (2 to 3 drugs together), 30-40% of patients are incurable with existing drugs

Opinion leaders lead market Prescribed by doctors who specialize in nerve disorders; competitiveness of drugs most critical factor

Preference for new drugs Patients insensitive to costs due to risk of recurrence; preference is for new treatments

Source: SK Biopharmaceuticals, Samsung Securities

Cenobamate: Decrease in seizure frequency

(%) Dosage group (A) Placebo group (B) Difference (A-B)

Cenobamate Phase IIb (n = 400) 55 24 31

Phase IIa (n = 200) 56 22 34

Vimpat 2007-2010 clinical trials 37 18 19

Difference Cenobamate’s Phase IIb vs Vimpat 18 6 12


Cenobamate: Percentage of seizure-free patients

(%) Dosage group (A) Placebo group (B) Difference (A-B)

Cenobamate Phase IIb (n = 400) 11 1 10

Phase IIa (n = 200) 28 9 19

Vimpat 2007-2010 clinical trials 3 1 2

Difference Cenobamate’s Phase IIb vs Vimpat 8 0 8

Note: Six weeks for Phase IIa, 12 weeks for Phase IIb


Healthcare

2017. 6. 15

49

Cenobamate:

Decrease in seizure frequency vs placebo

Cenobamate:

Percentage of seizure-free patients vs placebo

Source: Company data, Samsung Securities Source: Company data, Samsung Securities

SK Biopharmaceuticals: Major R&D pipeline

Pipeline Indication Market size (USDb) Phase I Phase II Phase III Note

Cenobamate

(YKP3089)

Epilepsy

(partial and general seizures) 4.6

To seek US FDA approval in 4Q17

Carisbamate

(SKL-N09) Orphan epilepsy 0.7

Phase II trials to start by end-2017

SKL-N05*

(JZP-110)

Sleep disorders sleep apnea

and narcolepsy 1

Released sleep apnea results in Mar 2017 Released narcolepsy results in Apr 2017

SKL13865 ADHD 7

Plans to start Phase II by end-2017

SKL20540 Schizophrenia 6

Submitted IND to US FDA in 4Q16 YKP10811

(Relenopride) GI disorders 3

Clinical trials for irritable bowel syndrome To develop gastroparesis treatment with a partner

Note: * Out-licensed to leading narcolepsy player Jazz Pharmaceutical in 2011


10

19

2

02468

101214161820

Phase IIb (n=400) Phase IIa (n=200) 2007-2010 clinicaltrials

Cenobamate Vimpat

(%)

3134

19

0

5

10

15

20

25

30

35

40

Phase IIb (n=400) Phase IIa (n=200) 2007-2010 clinicaltrials

Cenobamate Vimpat

(%)

Healthcare

2017. 6. 15

50

SK Bio: Cenobamate value

(KRWb) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Epilepsy drug market in 7 major countries* 4.9 5.0 5.2 5.3 5.4 5.5 5.6 5.8 5.9 6.0 6.2 6.3 6.5 6.6

Chg (%) 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3

Development schedule and patent expiry Phase III Approval Launch Patent expiry

Sales (USDm) 64 176 303 429 546 625 753 900 1,026 1,182 1,348 1,520

Market share** (%) 2.8 7.7 13.2 18.7 23.7 27.2 32.7 39.1 44.6 51.4 58.6 66.1

KRW-based revenue (based on KRW1,200/USD) 77 211 364 515 655 750 904 1,080 1,231 1,418 1,618 1,824

EBIT (assumes EBIT margin of 50%) 38 106 182 257 328 375 452 540 616 709 809 912

Free cash flow (post-tax rate of 22.5%) 30 82 141 199 254 291 350 419 477 550 627 707

Discount factor (WACC of 10%) 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3

Present value of FCF 22 56 87 113 130 136 148 161 167 175 182 186

Sum of present value 1,564 Continuing value 221 Continuing rate (%) 90.0 Net present value 1,785 Success rate (%) 87.9 Fair value 1,569 Note: * Outlook based on Datamonitor Healthcare (US, Japan, France, Germany, Italy, Spain, and the UK)


Healthcare

2017. 6. 15

51

SK Bio: SKL-N05 (JZP-110) value

(KRWb) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Indication: Narcolepsy

Market* (USDb) 1.4 1.6 1.8 2.0 2.2 2.4 2.7 2.9 3.1 3.3 3.4 3.6 3.7 3.7

Market growth (%) 11.9 11.9 11.9 11.9 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0

Xyrem sales in US (USDb) 1.2 1.3 1.4 1.4 1.6 1.7 1.1 1.0 0.9 0.8 0.8 0.7 0.6 0.6

Sales growth (%) 11.4 8.7 3.6 4.0 8.5 8.1 (36.4) (8.3) (8.3) (8.3) (8.3) (8.3) (8.3) (8.3)

Market share (%) 86.6 84.1 77.9 72.4 70.8 69.6 40.6 34.5 29.5 25.5 22.3 19.6 17.5 15.7

JZP-110 sales (USDb) 0.0 0.1 0.1 0.2 0.3 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.6

Sales growth (%) 571.4 123.8 66.5 46.7 36.3 8.0 7.0 6.0 5.0 4.0 3.0 2.0

Market share (%) 0.5 3.0 6.0 9.0 12.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0

Indication: Obstructive sleep apnea

JZP-110 sales** (USDb) 0.0 0.0 0.1 0.2 0.3 0.4 0.4 0.5 0.5 0.6 0.7 0.7 0.8

Sales growth (%) 500.0 150.0 65.0 50.0 40.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Development schedule and patent expiry Phase III Approval Patent expiry

Royalty sales (USDm) 1.1 7.0 16.6 27.5 40.8 56.4 61.4 66.7 72.1 77.6 83.2 88.9 94.7

KRW-based revenue (based on KRW1,200/USD) 1.3 8.4 19.9 33.0 49.0 67.6 73.7 80.0 86.5 93.1 99.8 106.7 113.6

EBIT (margin: 50%) 1.2 7.6 17.9 29.7 44.1 60.9 66.4 72.0 77.8 83.8 89.8 96.0 102.3

Free cash flow (tax rate: 22.5%) 0.9 5.9 13.9 23.0 34.2 47.2 51.4 55.8 60.3 64.9 69.6 74.4 79.3

Discount factor (WACC: 10%) 0.9 0.8 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3

Present value of free cash flow 0.8 4.4 9.5 14.3 19.3 24.2 24.0 23.7 23.3 22.8 22.2 21.5 20.9

Sum of present value 230.8

Continuing value 24.7

Continuing rate (%) 90.0

Net present value 255.5

Success rate (%) 87.9

Fair value 224.6

Note: * Outlook based on Grand View Research (2014-2020E)

** Assumes JZP-110 will attain 70% of peak sales of Teva’s Provigil in 2011 if approved for same indication; market share expected to reach 30%, 15%, or 5% if development occurs with large foreign pharmaceutical maker, medium-sized

foreign pharmaceutical maker, or in-house, respectively


Healthcare

2017. 6. 15

52


Recommend selective approach on those positioned well to benefit

Government to promote pharma/biotech/medical device industries: Korea’s new

government, striving to bring the nation out of low growth, presented a policy to nurture industries

that create high added value. The policy centers on supporting innovative technology-driven

industries such as ones in areas such as biotech nano and life sciences. The administration said it will:

1) set up a biotech control tower manned by industry specialists under the Ministry of Health &

Welfare; 2) produce reasonable guidelines (in line with international ones) to promote the

pharma/biotech/medical-device industries; and 3) increase policy predictability via presenting a

medium- to long-term plan. Moreover, the government also plans to: 1) improve the pricing system

for insured drugs to help boost global penetration of drugs developed by Korean firms; 2) create a

new drug development ecosystem by setting up a collaborative system among industry, academia,

and R&D centers; and 3) promote oriental medicine and dentistry as strategic national industries.

Government to end policy of allowing medical facilities to seek profits: The government

is likely to exclude the healthcare sector from the Basic Act on Service Industry. Specifically, it plans

to: 1) confine telemedicine to sharing information among practitioners; 2) ban hospitals from

establishing profit-seeking subsidiaries; 3) allow hospitals to seek efficiency only within areas allowed

under current laws; and 4) ban corporate pharmacies backed by large capital as they are highly likely

to turn into profit-seeking chains.

Implant, hearing aid, and dementia segments to benefit: On the campaign trail, the

president pledged to: 1) raise the basic monthly pension (paid to 70% of lower-income seniors aged

65 and older) from KRW200,000 to KRW300,000; 2) lower a patient’s implant cost from

KRW550,000-600,000/tooth to KRW300,000/tooth; and 3) make the government take full charge

of dementia patients and strengthen related benefits of the nation’s long-term care insurance. Based

on his pledges, it is likely insurance will increase the number of teeth that are covered for implants

(from two currently), and that financial burdens related to hearing-aid use will decline. The

government plans to set up a dementia support center, cap dementia patients’ medical cost burdens,

set up public hospitals dedicated to dementia, and establish more public, long-term care facilities.

Moreover, in taking full responsibility for dementia patients, it should make expand long-term care

insurance to include patients showing minor symptoms.

Contents


p2


p7


p32


p52



p87

Company p105

Healthcare

2017. 6. 15

53

President Moon’s election pledge for healthcare industry

Category Major point Detail

Nurture

healthcare

industry

Improve pricing system for insured drugs Diversify new drug pricing structure

Support pharmaceutical industry To establish a division for pharm/biotech/medical device industry in ‘4th industry

committee’ directly under president

Build an ecosystem of new drug development To build industry-academy cooperation system

Nurture oriental medicine and dental industries To designated as government’s strategic industry

Strengthen

public

services

Reduce patients’ out of pocket expenses To limit a patient’s out of pocket expenses within KRW1m

Take charge of treating dementia patients Subsidize treatment of demetia by paying amount exceeding certain level; establish

centers and hospitals for patients

Expanding insurance coverage Expand national health insurance coverage to cover expensive diagnostic tests and

new drugs, and new medical technologies

Expanding insurance coverage for elders Expand national health insurance coverage of dental implants, hearing aids, and

dentures

Aid medical expenses in disasters Subsidize hospitalized patients and outpatients with expensive medical costs up to

KRW20m per person per year

Government is in charge of children

under 15 years old Subsidize hospital treatment for children under 15 years old

Ban hospitals from profit-seeking

Confine telemedicine to promoting treatment efficiency among practitioners; ban

hospitals from establishing profit-seeking subsidiaries; ban corporate pharmacies

backed by large capital

Expand national influenza vaccine program Provide influenza vaccines for students (elemental/middle/high)

Establish public supply system for essential drugs

Expand insurance coverage for oriental medicine Expand national health insurance coverage of oriental medicine

Support local clinics and pharmacies

Limit large hospitals from receiving outpatients; enhance forwarding system between

hospitals and local clinics; reduce out-of-pocket costs for patients using local clinics and

pharmacies; expand medical charge at night or on holidays

Expand regional hospitals Expand regional rehabilitation hospitals for children; nurture and support general

hospitals in 25 vulnerable regions.

Induce cutting private insurance premium Induce cutting private insurance premium as much as the amount benefiting from

national health insurance

Support women’s health rights Expand government support in vulnerable region for pregnant women; expand number

of beds for treating newborns

Support and expand medical staffs Revise system to foster growth of medical staffs via scholarships and hire more public medical staff; enact a law to support medical staffs

Enhance incentives and punishment

for medical institutions

Strengthen punishment on illegal hospitals; offer incentives related to treating chronic diseases and reducing medical costs

Prevent and

manage

natural and

social disasters

Establish hospitals specialized in infectious

diseases and expand epidemiologic investigator

Establish central and regional hospitals that specialize in infectious diseases; establish an infectious disease response center under Korean Centers for Disease Control & Prevention; ensure Korean Centers for Disease Control & Prevention’s specialty and independency

Source: Local press, Samsung Securities

Healthcare

2017. 6. 15

54

Implant market to benefit from health insurance expansion

Korea’s Ministry of Health & Welfare on Jul 1 last year expanded health insurance coverage to

include dental implants for patients aged 65 or older. Previously, the age threshold was 75 from Jul

2014 and 70 from Jul 2015. Under the expanded coverage, an insured patient now pays just 50% of

the original cost for up to two implants (for any tooth) during their lifetime. Based on a government

survey, an implant typically costs an insured patient KRW1,165,720—ie, KRW1,055,720 procedure

and KRW110,000 material costs. Although the costs vary by clinic, some clinics charge an uninsured

implant patient as little as KRW1.2m per implant.

Korea’s implant market, backed by expanding coverage since 2014, has grown at a solid pace.

According to the National Health Insurance Corporation, its cost of implants saw a CAGR of 22.8%

from KRW1.7t in 2013 to KRW3.18t in 2016, with combined domestic sales of the nation’s top three

implant firms (ie, Osstem Implant, Dentium, and Dio) climbed 20.2% pa from KRW98.3b in 2013 to

KRW169.9b in 2016. According to the Health Insurance Review & Assessment Service, insured

implant sales volume saw at a CAGR of 142.9% y-y from 36,702 in 2014 to 491,083 in 2016, and the

number of implant patients jumped 147.8% y-y pa from 21,805 to 300,543 over the same period.

Market leader Osstem Implant’s earnings show that coverage expansion from 2014 has been the

main driver of growth. The company’s insured implant sales jumped 84.6% y-y from KRW6.5b in

2015 to KRW12b in 2016, with the insured portion accounting for 62.5% of the y-y domestic implant

sales gain of KRW19.2b. The nation’s top-five players—Osstem Implant, Dentium, Dio, Neo Biotech,

and Megagen Implant—benefitted most from the coverage expansion as: 1) foreign brands were

excluded; and 2) dentists likely prefer products with strong brand recognition, noting material costs

are relatively fixed.

Korea’s implant market is already saturated, with the nation boasting the world’s highest penetration

rate. Straumann reports that 412 implants were sold for every 10,000 Koreans in 2015, more than

twice the level of the next highest nation. This raised concerns that, absent further expansions in

insurance coverage, growth will slow in Korea’ implant market. The new president’s apparent

commitment to expand coverage for the elderly should ease such concerns. If the president follows

through on his campaign pledges, we estimate that the domestic implant market will grow 15-20% pa

over the next few years.

Healthcare

2017. 6. 15

55

Korean dental implant players: Domestic sales Dental implant sales covered by NHIS

Note: Sums sales of Osstem Implant, Dentium, and Dio


Source: Osstem Implant

Number of dental implant patients covered by NHIS

(Number of patients) 2014 2015 2016

Aged 65-69 n/a n/a 96,490

Aged 70-74 n/a 55,855 120,795

Aged 75-79 16,324 49,142 60,284

Aged over 80 5,481 16,294 22,974

Total 21,805 121,291 300,543

Growth (% y-y) n/a 456.3 147.8

Source: Health Insurance Review and Assessment Service

Dental implant sales volume covered by NHIS

(Unit) 2014 2015 2016

Aged 65-69 n/a n/a 156,518

Aged 70-74 n/a 92,726 198,676

Aged 75-79 27,442 82,219 98,357

Aged over 80 9,260 27,194 37,532

Total 36,702 202,139 491,083

Growth (% y-y) 450.8 142.9

Source: Health Insurance Review and Assessment Service

98.3 112.0

141.4

169.9

0

5

10

15

20

25

30

0

40

80

120

160

200

2013 2014 2015 2016

(%)(KRWb)

Sales (LHS) Growth (RHS)

6.5

12.0

0

2

4

6

8

10

12

14

2015 2016

(KRWb)

+84.6% y-y

Healthcare

2017. 6. 15

56

Drug expenditure cap a possibility

NHIS cumulative surplus hits KRW20t in 2016… The NHIS posted an annual surplus of

KRW3.1t for 2016 (down 26.1% y-y) on revenue and expense growth of 6.3% and 9.1% y-y to

KRW55.7t and KRW52.6t, respectively. The revenue consists of insurance premiums (KRW47.3t; up

7.4% y-y) and government aid (KRW7.4t; down 0.4% y-y), with the latter coming from government

coffers (equivalent to 14% of expected insurance premium revenue in the year) and the National

Health Promotion Fund (6%). The agency’s cumulative surplus rose 18.3% y-y to KRW20t.

…but likely to fall to KRW17.2 t in 2020: Based on data submitted to the National Assembly,

the NHIS over 2017-2020 expects its: 1) revenue to grow 6.9% pa on premium hikes and increased

funding; and 2) expenses to expand 8.7% pa due to coverage expansions and greater use of medical

services. If correct, the program will suffer an annual deficit of KRW1.2t in 2019, with the cumulative

surplus peaking at KRW21.2t in 2018 and falling to KRW17.2t in 2020. With yields on managed

assets in 2016 a meager 1.7%, the NHIS intends to cut exposure to Korean bonds and diversify into

overseas stocks and alternative investments.

Aid normalization, premium hikes key: The National Health Insurance Act set government

aid at 20% of estimated annual insurance premium revenue. The government, however, has not

fulfilled its mandate, with unpaid government aid over 2007-2015 reaching KRW14.7t. Meanwhile,

after a 5.9% premium hike in 2011, growth in premiums collected has been slowing and should come

in flat y-y this year, totaling 6.12% of income. Even though expenditures by the NHIS have seen a

CAGR of 7.1% over 2011-2016, premium hikes have been moderate as pharmaceutical firms pared 14%

on average from drug prices in 2012. NHIS’s finances should improve if premiums rise and the

government makes good on its aid commitment. (Price cuts in 2012 reduced the drug portion of

medical costs from 29.1% in 2011 to a record low of 25.7% in 2016.)

Generous healthcare policy to burden finances: President Moon’s election pledges included

reducing the cap on out-of-pocket expenses for lower income people to KRW1m, increasing state

responsibility for hospitalized children under 15, and offering financial support for catastrophic

medical expenses. If implemented: 1) insurance expansion would cover more services, making the

out-of-pocket limit more meaningful; 2) out-of-pocket portion of costs would fall to 5% for those

under 15 years; and 3) patients facing expensive medical bills would receive government support of

up to KRW2m pa according to income levels. Also, national health insurance would expand to cover

expensive diagnostic exams, novel drugs, and new high-tech medical procedures, as well as costs

associated with employing care assistants, choosing more-experienced doctors, and staying in a

premium hospital room. Out-of-pocket ratios would vary by income level. The new regime’s

generous healthcare policy is likely to weigh on NHIS finances.

Healthcare

2017. 6. 15

57

NHIS surpluses and deficits: Annual and cumulative

Note: Based on cash flows; forecast are NHIS’s figures


NHIS: Annual revenue and expenditure

Note: Based on cash flows; forecast are NHIS’s figures


NHIS: Revenue breakdown (2016) NHIS: Expenditure breakdown (2016)

Note: Based on cash flows


Note: Based on cash flows


0

10

20

30

40

50

60

70

80

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2020E

Revenue

Expenditure

(KRWt)

KRW52.6t

Administration and other costs:

3%

Insurance benefit costs:97%

Contribution revenue:

85%

Other:2%

KRW55.7t

Governmentsubsidies:

13%

(5)

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2020E

Annual

Cumulative

(KRWt)

Healthcare

2017. 6. 15

58

Medical costs covered by NHIS: Breakdown of fees-for-services portion


Medical costs covered by NHIS: Pharmaceutical portion

Note: Pharmaceutical portion seems increased in 2014 due to change of calculation method change (excluding

expenditure in case-payment system since 2014)


National Health Insurance: Premiums and growth


Medical treatment:43.1%

Base fee:27.2%

Pharmaceutical spending:

25.7%

Medical supplies:4.1%

20

21

22

23

24

25

26

27

28

29

30

0

2

4

6

8

10

12

14

16

18

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(KRWt) (%)

Pharmaceutical spending (LHS)

As portion of total costs covered by NHIS (RHS)

0

5

10

15

20

25

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(%) (% y-y)

Insurance premium (LHS)Growth (RHS)

Healthcare

2017. 6. 15

59

Korean government: Shortfalls in payments to NHIS

Source: Labor union of National Health Insurance Service, Samsung Securities

0.7

1.0

0.6

0.8

1.6

1.9 2.0 2.0

1.8

2.4

0.0

0.5

1.0

1.5

2.0

2.5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(KRWt)

Healthcare

2017. 6. 15

60

Pharma to shoulder expenses exceeding NHIS budget? The NHIS, rather than controlling

the price of each drug (as it currently does), may assign an expenditure cap for each therapeutic class

(eg, hypertension, diabetes). Expenses exceeding the budget limit would be shouldered by

pharmaceutical firms. The move could thus have the biggest impact on the pharmaceutical industry

since 2012 when the government cut prices of 6,506 (out of 13,814) drugs on the formulary list,

causing a 14% drop on average. In 2011, an NHIS committee for advancing healthcare insurance

proposed: 1) capping growth in aggregate drug expenditures by therapeutic class; and 2) having

pharmaceutical firms reimburse drug costs that exceed the cap. In 2013, the Korea Institute for

Health and Social Affairs published A Study on Fixed Budget for Pharmaceutical Expenditures which,

after comparing drug budgets across countries, asserted that a fixed drug budget is necessary to

contain drug spending in the face of aging population and increasing number of people using medical

services.

Cap in Taiwan fails to address deficits: Taiwan introduced its National Health Insurance

(NHI) in 1995 on a fee-for-service basis, exempting out-of-pocket payments for certain medical

services such as child delivery. To contain rapidly rising costs, the nation implemented an

expenditure cap for dental care in 1998, outpatient care in 2001, and inpatient care in 2002. The

expenditure cap is adjusted every year as follows.

• Expenditure cap for new year = per-capita costs of covered medical services in 2016 x [1+ growth

in costs of covered medical services (non-negotiable factors + negotiable factors)] x number of

policyholders

The expenditure cap is based on both negotiable and non-negotiable factors. Negotiable factors refer

to changes in the scope of covered services, costs of enhancing medical service quality and promoting

health, magnitude of medical service usage; non-negotiable ones refer to natural growth in medical

service users (due to population growth and changing demographics by age and gender), and medical

service costs (eg, labor, drug, medical supplies).

Despite the expenditure caps, however, the NHI remained mired in deficits. In 2002 when it first

introduced the expenditure cap to all services, it posted a surplus of TWD8.7b (KRW326.9b) but

slipped back to a deficit of TWD12.6b (KRW473.5b) in 2007 which widened to TWD58.2b (KRW2.2t)

in 2009. Annual growth in medical expenditures typically outstripped that of premiums due to

population aging and heavy spending on major illnesses. To address the NHI’s financial woes, the

nation in 2011 undertook a major health care reform—the Second-Generation NHI—which it

implemented in 2013. The new plan levied: 1) additional premiums on employers and policyholders;

and 2) supplemental premiums in six additional areas (including rent, interest, and dividends),

establishing a new premium base.

Study results on drug expenditure cap due in July: The Ministry of Health and Welfare’s

Pharmaceutical Benefits Division in 2016 hinted at the need to introduce a drug expenditure cap. In

March 2017, the NHIS commissioned a study to explore ways to introduce a drug expenditure cap

(with the Seoul National University College of Nursing Professor Kim Jin-Hyun). The project, unlike

previous ones that simply looked into overseas cases and studied drug prices, focuses solely on

capping aggregate drug expenditures. The results should be announced by end-July.

Healthcare

2017. 6. 15

61

Taiwan National Health Insurance Administration

Annual revenue and expense Annual balance

Note: Accrual basis

Source: Taiwan National Health Insurance Administration

Samsung Securities

Note: Accrual basis

Source: Taiwan National Health Insurance Administration

Samsung Securities

(

(60)

(40)

(20)

0

20

40

60

80

100

120

1995 1998 2001 2004 2007 2010 2013

(TWDb)

194.5 311.2

391.9 407.5

157.4

326.9

405.6 439.2

0

100

200

300

400

500

600

700

1995 1998 2001 2004 2007 2010 2013

Revenue Expense

(TWDb)

Healthcare

2017. 6. 15

62

Regulations over rebates may tighten again

Mandatory reporting to be implemented… The Ministry of Health and Welfare (MOHW) on

Mar 27 revealed a proposal that makes it mandatory for pharmaceutical firms to collect/track data

and submit reports regarding any financial incentives provided to pharmacists or physicians).

Reports should include offerings of sample products, support of clinical trials, post-launch surveys,

introductions of new drugs at big events (involving multiple institutions) or via a visit to a single

institution, assistance to academic events, and discounts on costs (ie, favorable payment terms). For

example, reports on academic events should include the event’s host, title, venue, and time, as well as

the total amount of financial support.

…with legally enforceable provisions: Pharmaceutical firms must submit the required

documents to the MOHW within three months of the end of a financial year and keep related data.

The MOHW reviews the reports and can ask law enforcement to become involved if required. Firms

that break rules are subject to corrective orders and fines (less than KRW1m), and failure to follow

corrective orders results in a fine of KRW2m. Furthermore, penalties for violating the prohibition of

providing financial incentives can reach up to three years in prison or KRW30m in fines.

Impacts to be limited: Major regulations related to rebates in Korea’s pharmaceutical industry

include: 1) dual punishment (Nov 28, 2010), where both the giver and receiver are punished; 2) a

two-strike rule (Jul 1, 2014) in which the offender can have its drug removed from NHIS list; and 3)

the anti-corruption law (Sep 28, 2016). Government investigations into pharmaceutical firms in 2011

led to the prosecution of three doctors that received rebates, and administrative sanctions for 212

doctors, marking the first case of dual-punishment. Meanwhile, the MOHW on Apr 27, 2017

announced the suspension of nine of Novartis Korea’s drugs from national insurance coverage for six

months and fined the company a combined KRW55.1b related to 33 other drugs, marking the first

case of the two-strike rule. We believe the mandatory reports on financial incentive offerings simply

complement existing anti-rebate regulations and will have limited impacts.

Healthcare

2017. 6. 15

63

Drug expenditure cap negative for firms dependent on prescription drugs

The MOHW on Aug 12, 2011 announced a new drug pricing policy and measures to advance the

pharmaceutical industry, which included: 1) a change in the calculation method for drug prices; 2)

restricting prescriptions of unnecessary and high-price drugs; 3) selecting and supporting innovative

pharmaceuticals; and 4) supporting R&D activities and strengthening capabilities to tap global

markets. These measures targeted: 1) stabilizing the fiscal status of the NHIS via drug price cuts

(which were capped at 33.1%) and controlling drug usage; and 2) restructuring the pharmaceutical

industry to focus on globally competitive, innovative players with R&D capabilities. Under the new

policy, prices of off-patent original drug prices were cut to 70% and those for generic ones to 59.55%

of previous levels. All prices were cut to 53.55% of pre-off-patent levels in one year after patents

expired. Indeed, 8,776 drugs (60.9% of the total) listed on the NHIS list whose prices were higher

than 53.55% of pre-off-patent original drug prices had their prices cut in Mar 2012 by an average of

14%, with the maximum cut reaching 33.1%.

In 2011, affected by such measures, the Kospi Medical Supplies Index fell 10.9%, the Kosdaq

Pharmaceuticals Index rose 36.2%, and the Kosdaq Medical & Precision Machines Index increased

30.8%. Companies in the Kospi Medical Supplies Index saw their combined operating profit decline

38.7% for that year as price cuts led to corrections in retail inventories and returns. Combined

operating profit at companies in the Kosdaq Pharmaceuticals Index and the Kosdaq Medical &

Precision Machines Index rose a respective 23% and 54.6%, defying the drug pricing policy reforms.

Among the top-20 companies in terms of 2011 share performance, most belonged to the Kosdaq

Pharmaceuticals Index and the Kosdaq Medical & Precision Machines Index. Among the bottom-20,

most were a part of the Kospi Medical Supplies Index. In short, if the drug expenditure cap system is

put in place, investors would need to turn their attention from prescription drugs-focused players—

who are mostly in the Kospi Medical Supplies index—to those specializing in OTC drugs, exports,

health supplements, biotech, diagnostics, medical esthetics, and medical devices.

Korean healthcare indices

Operating margins in 2011-2012 Operating profit and market cap change in 2011

Source: QuantiWise, Samsung Securities Source: QuantiWise, Samsung Securities

12.7

8.2

15.4

6.7

12.2

5.3

14.7

8.6

02468

1012141618

KRXHealthcare

Kospi MedicalSupplies

KosdaqPharmaceutical

Kosdaq Medicaland

PrecisionMachines

2011 2012

(%)

(14.9)

(38.7)

23.0

54.6

(13.9) (10.9)

36.230.8

(60)

(40)

(20)

0

20

40

60

KRX Healthcare Kospi MedicalSupplies

KosdaqPharmaceutical

Kosdaq Medicaland Precision

Machines

2010-2011 operating profit change

2010-2011 market cap change

(% y-y)

Healthcare

2017. 6. 15

64

Korean healthcare firms: Top-20 share performances in 2011

Rank Company Subsector Market cap at end-2011 (KRWb) Share price change in 2011 (%)

1 InBody Health Care Equipment & Supplies 167 339.6

2 Medipost Biotechnology 1,272 321.6

3 Dai Han Pharmaceutical Pharmaceuticals 62 241.7

4 Solco Biomedical Health Care Equipment & Supplies 103 187.8

5 Sewoon Medical Health Care Equipment & Supplies 234 162.3

6 Macrogen Life Sciences Tools & Services 201 157.6

7 Biotoxtech Life Sciences Tools & Services 71 155.4

8 Huvitz Health Care Equipment & Supplies 126 154.6

9 Infinitt Healthcare Health Care Technology 398 150.8

10 Seegene Life Sciences Tools & Services 978 135.2

11 Young Jin Pharm Pharmaceuticals 348 131.1

12 Green Cross Cell Biotechnology 136 118.8

13 CTC Bio Pharmaceuticals 136 106.6

14 Meta Biomed Health Care Equipment & Supplies 70 102.0

15 Estech Pharma Pharmaceuticals 79 101.0

16 Oscotec Biotechnology 62 100.5

17 JW Shinyak Pharmaceuticals 352 96.5

18 Seoul Pharm Pharmaceuticals 30 94.0

19 Dae Hwa Pharm Pharmaceuticals 91 93.4

20 Su-Heung Life Sciences Tools & Services 176 89.1

Korean healthcare firms: Bottom-20 share performance in 2011

Rank Company Subsector Market cap at end-2011 (KRWb) Share price change in 2011 (%)

1 Botabio Pharmaceuticals 10 (69.0)

2 ISU Abxis Pharmaceuticals 88 (46.5)

3 Panagene Life Sciences Tools & Services 102 (43.4)

4 ilShinbiobase Life Sciences Tools & Services 24 (43.3)

5 CKH Food & Health Pharmaceuticals 186 (41.6)

6 Samsung Pharm Pharmaceuticals 14 (41.3)

7 Hanmi Science Pharmaceuticals 198 (40.9)

8 Value Added Technology Health Care Equipment & Supplies 108 (38.8)

9 Wooridul Pharmaceutical Pharmaceuticals 28 (38.5)

10 Daewoong Pharmaceutical Pharmaceuticals 319 (37.9)

11 Aminologics Health Care Technology 194 (36.6)

12 Boryung Pharm Pharmaceuticals 111 (35.3)

13 LG Life Sciences Pharmaceuticals 569 (34.8)

14 Cellumed Health Care Equipment & Supplies 64 (33.5)

15 Genematrix Biotechnology 22 (31.0)

16 Samjin Pharm Pharmaceuticals 111 (30.3)

17 Pharmswellbio Pharmaceuticals 20 (30.1)

18 Daewon Pharmaceutical Pharmaceuticals 64 (29.8)

19 Donga Socio Holdings Pharmaceuticals 989 (27.8)

20 Yuhan Pharmaceuticals 1,422 (26.5)

Note: Based on 128 firms listed in Kospi and Kosdaq in 2011


Healthcare

2017. 6. 15

65

Korean healthcare firms: Exports portion in 2016 (1)

Company Code Subsector Export (%) Company Code Subsector Export (%)

Samsung Biologics 207940 Pharmaceuticals 100.0 Eubiologics 206650 Biotechnology 47.0

Alteogen 196170 Biotechnology 100.0 Dio 039840 Health Care Equipment & Supplies 46.5

Access Bio 950130 Life Sciences Tools & Services 99.6 Kyongbo Pharmaceutical 214390 Pharmaceuticals 45.7

Boditech Med 206640 Life Sciences Tools & Services 98.0 Oscotec 039200 Biotechnology 43.6

High Tech Pharm 106190 Pharmaceuticals 97.5 Panagene 046210 Life Sciences Tools & Services 41.8

Intromedic 150840 Health Care Equipment & Supplies 95.8 Su-Heung 008490 Life Sciences Tools & Services 39.5

KPX Lifescience 114450 Pharmaceuticals 93.4 Amicogen 092040 Biotechnology 37.7

Caregen 214370 Biotechnology 93.0 L&K Biomed 156100 Health Care Equipment & Supplies 37.4

Cell Biotech 049960 Biotechnology 90.0 Young Jin Pharm 003520 Pharmaceuticals 35.4

Celltrion 068270 Pharmaceuticals 84.8 Corentec 104540 Health Care Equipment & Supplies 32.6

Seegene 096530 Life Sciences Tools & Services 82.9 CU Medical Systems 115480 Health Care Equipment & Supplies 31.8

ST Pharm 237690 Pharmaceuticals 82.6 Green Cross Cell 031390 Biotechnology 30.5

i-Sens 099190 Health Care Equipment & Supplies 81.9 Komi Pharm International 041960 Pharmaceuticals 30.0

CKD Bio 063160 Pharmaceuticals 80.8 Woogene B&G 018620 Pharmaceuticals 28.4

NanoenTek 039860 Health Care Equipment & Supplies 80.6 Donga ST 170900 Pharmaceuticals 26.2

Kolon Life Science 102940 Pharmaceuticals 80.3 Bioneer 064550 Biotechnology 24.6

Mediana 041920 Health Care Equipment & Supplies 78.4 Prostemics 203690 Biotechnology 24.3

Value Added Technology 043150 Health Care Equipment & Supplies 77.2 Cosmax BTI 044820 Pharmaceuticals 23.7

Nibec 138610 Health Care Equipment & Supplies 75.8 Solco Biomedical 043100 Health Care Equipment & Supplies 20.7

Huvitz 065510 Health Care Equipment & Supplies 75.3 Won Ik 032940 Health Care Equipment & Supplies 20.2

Logos Biosystems 238120 Life Sciences Tools & Services 75.3 Anygen 196300 Biotechnology 19.9

PJ Electronics 006140 Health Care Equipment & Supplies 72.1 Daihan Scientific 131220 Life Sciences Tools & Services 19.7

ATGen 182400 Life Sciences Tools & Services 71.3 Yuhan 000100 Pharmaceuticals 18.7

Vieworks 100120 Health Care Equipment & Supplies 71.3 ilShinbiobase 068330 Life Sciences Tools & Services 18.6

Macrogen 038290 Life Sciences Tools & Services 69.7 Daesung Microbiological Labs 036480 Pharmaceuticals 17.7

Lutronic 085370 Health Care Equipment & Supplies 69.7 Sinsin Pharmaceutical 002800 Pharmaceuticals 17.6

Drtech 214680 Health Care Equipment & Supplies 65.0 Green Cross 006280 Pharmaceuticals 17.0

Medytox 086900 Biotechnology 62.8 DongKook Pharm 086450 Pharmaceuticals 16.9

Rayence 228850 Health Care Equipment & Supplies 62.6 Humedix 200670 Pharmaceuticals 16.1

Meta Biomed 059210 Health Care Equipment & Supplies 61.4 Choong Ang Vaccine 072020 Pharmaceuticals 15.8

Infinitt Healthcare 071200 Health Care Technology 59.3 Huons* 243070 Pharmaceuticals 15.6

Dentium 145720 Health Care Equipment & Supplies 59.3 Gene Bio Tech 086060 Pharmaceuticals 15.4

Estech Pharma 041910 Pharmaceuticals 59.1 Biotoxtech 086040 Life Sciences Tools & Services 15.0

Hironic 149980 Health Care Equipment & Supplies 58.6 Green Cross Medical Science 142280 Health Care Equipment & Supplies 14.5

Mezzion Pharma 140410 Pharmaceuticals 55.8 Sewoon Medical 100700 Health Care Equipment & Supplies 14.0

Hugel 145020 Biotechnology 54.4 Shin Poong Pharm 019170 Pharmaceuticals 14.0

Il-Yang Pharm 007570 Pharmaceuticals 54.1 Cheil Bio 052670 Pharmaceuticals 12.4

Hans Biomed 042520 Biotechnology 53.6 CTC Bio 060590 Pharmaceuticals 12.1

Astar 246720 Health Care Equipment & Supplies 53.4 Korea United Pharm 033270 Pharmaceuticals 11.8

Interojo 119610 Health Care Equipment & Supplies 52.6 Peptron 087010 Biotechnology 11.6

InBody 041830 Health Care Equipment & Supplies 52.3 Naturalendo Tech 168330 Pharmaceuticals 11.2

MEKICS 058110 Health Care Equipment & Supplies 51.1 Intron Biotechnology 048530 Life Sciences Tools & Services 10.9

Nutribiotech 222040 Pharmaceuticals 51.0 Daewoong Pharm 069620 Pharmaceuticals 10.8

PCL 241820 Life Sciences Tools & Services 49.8 U&I Corporation 056090 Health Care Equipment & Supplies 10.7

ISU Abxis 086890 Pharmaceuticals 48.6 Eagle Veterinary Technology 044960 Pharmaceuticals 10.5

GenoFocus 187420 Biotechnology 48.2 Je Il Pharm 002620 Pharmaceuticals 10.2

SK Chemicals 006120 Chemicals 47.6 Daehan New Pharm 054670 Pharmaceuticals 10.0

Osstem Implant 048260 Health Care Equipment & Supplies 47.5 Next BT 065170 Pharmaceuticals 9.6

JVM 054950 Health Care Equipment & Supplies 47.3 Samsung Pharm 001360 Pharmaceuticals 9.5

Note: * Before spin-off Source: Company data, Samsung Securities

Healthcare

2017. 6. 15

66

Korean healthcare firms: Exports portion in 2016 (2)

Company Code Subsector Export (%) Company Code Subsector Export (%)

Hanmi Pharm 128940 Pharmaceuticals 9.3 Kwang Dong Pharm 009290 Pharmaceuticals 0.8

ChoA Pharm. 034940 Pharmaceuticals 9.0 Sam Il Pharm 000520 Pharmaceuticals 0.7

Bioleaders 142760 Biotechnology 8.8 DHP Korea 131030 Pharmaceuticals 0.7

Boryung Pharm 003850 Pharmaceuticals 8.4 Bukwang Pharmaceutical 003000 Pharmaceuticals 0.7

Neopharm 092730 Pharmaceuticals 8.3 Hanall Biopharma 009420 Pharmaceuticals 0.6

Shinhung 004080 Health Care Equipment & Supplies 7.9 Kyung Nam Pharm 053950 Pharmaceuticals 0.6

BIT Computer 032850 Health Care Technology 7.7 Reyon Pharmaceutical 102460 Pharmaceuticals 0.5

Kyung Dong Pharm 011040 Pharmaceuticals 6.6 HLscience 239610 Pharmaceuticals 0.3

Cellumed 049180 Health Care Equipment & Supplies 6.3 Wooridul Pharmaceutical 004720 Pharmaceuticals 0.2

Daewon Pharm 003220 Pharmaceuticals 5.8 Selvas Healthcare 208370 Health Care Equipment & Supplies 0.2

Theragen Etex 066700 Pharmaceuticals 5.5 Hyundai Pharmaceutical 004310 Pharmaceuticals 0.1

Futurechem 220100 Pharmaceuticals 5.4 Whan In Pharm 016580 Pharmaceuticals 0.1

Handok 002390 Pharmaceuticals 5.3 Qurient 115180 Biotechnology 0.0

SeouLinBioscience 038070 Biotechnology 5.2 Alvogen Korea 002250 Pharmaceuticals 0.0

Chong Kun Dang 185750 Pharmaceuticals 5.2 Sam-A Pharm 009300 Pharmaceuticals 0.0

DNA Link 127120 Life Sciences Tools & Services 5.1 UBCare 032620 Health Care Technology 0.0

Genematrix 109820 Biotechnology 5.1 Solborn 035610 Health Care Technology 0.0

BC World Pharm 200780 Pharmaceuticals 4.7 Pharmswellbio 043090 Pharmaceuticals 0.0

Aprogen pharmaceuticals 003060 Pharmaceuticals 4.6 C-Tri 047920 Pharmaceuticals 0.0

Dong Sung Pharm 002210 Pharmaceuticals 4.3 Nong Woo Bio 054050 Biotechnology 0.0

JW Pharmaceutical 001060 Pharmaceuticals 4.0 Hwail Pharm 061250 Pharmaceuticals 0.0

Eyegene 185490 Biotechnology 3.7 Anterogen 065660 Biotechnology 0.0

Young In Frontier 036180 Life Sciences Tools & Services 3.5 JW Shinyak 067290 Pharmaceuticals 0.0

Sam Chun Dang Pharm 000250 Pharmaceuticals 3.2 CrystalGenomics 083790 Life Sciences Tools & Services 0.0

Kukje Pharm 002720 Pharmaceuticals 3.1 LabGenomics 084650 Life Sciences Tools & Services 0.0

Dae Hwa Pharm 067080 Pharmaceuticals 3.0 ViroMed 084990 Biotechnology 0.0

Celltrion Pharm 068760 Pharmaceuticals 2.9 Chabiotech 085660 Biotechnology 0.0

Binex 053030 Pharmaceuticals 2.8 Genexine 095700 Biotechnology 0.0

Ahn-Gook Pharm 001540 Pharmaceuticals 2.7 Wooridul Huebrain 118000 Health Care Equipment & Supplies 0.0

JW Life Science 234080 Pharmaceuticals 2.6 Legochem Biosciences 141080 Life Sciences Tools & Services 0.0

MG MED 180400 Life Sciences Tools & Services 2.5 Corestem 166480 Biotechnology 0.0

Seoul Pharm 018680 Pharmaceuticals 2.3 Tego Science 191420 Biotechnology 0.0

Myungmoon Pharm 017180 Pharmaceuticals 2.1 HS Vital 204990 Pharmaceuticals 0.0

Aminologics 074430 Health Care Providers & Services 2.1 Pharma Research Products 214450 Pharmaceuticals 0.0

Shinil Pharm 012790 Pharmaceuticals 1.9 Sillajen 215600 Biotechnology 0.0

Jin Yang Pharmacetical 007370 Pharmaceuticals 1.8 Chemon 217600 Life Sciences Tools & Services 0.0

Korean Drug 014570 Pharmaceuticals 1.8 Kangstem Biotech 217730 Biotechnology 0.0

Medipost 078160 Biotechnology 1.8 Pangen Biotech 222110 Biotechnology 0.0

CMG Pharmaceutical 058820 Pharmaceuticals 1.7

Il Dong Pharm 249420 Pharmaceuticals 1.7

Yuyu Pharma 000220 Pharmaceuticals 1.6

Samjin Pharm 005500 Pharmaceuticals 1.3

Daebong LS 078140 Pharmaceuticals 1.3

Botabio 026260 Pharmaceuticals 1.1

Green Cross Lab Cell 144510 Health Care Providers & Services 0.9

Dai Han Pharmaceutical 023910 Pharmaceuticals 0.9

Il Sung Pharm 003120 Pharmaceuticals 0.9

Dong Wha Pharm 000020 Pharmaceuticals 0.9

GL Pharm Tech 204840 Pharmaceuticals 0.8


Healthcare

2017. 6. 15

67

Samsung healthcare coverage: Business portfolio in 2016

Note: * Based on Life Science division sales


Samsung healthcare coverage: Export portion in 2016

Note: * Based on parent-based sales

** Based on Life Science division sales


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API Plasma derivatives/vaccines Medical devices

Diagnostics Medical aesthetic Others

Healthcare

2017. 6. 15

68

Key issues in 2H

Pharmaceutical, biotech, and diagnostics segments

Green Cross’s IVIG-SN up for FDA approval in 2H

Green Cross on Nov 24, 2015 filed for US FDA approval for IVIG-SN. On Nov 22, 2016, the FDA

asked for more data on the manufacturing process for the immunodeficiency-disease treatment. The

company plans to prepare the requested data in 2Q and submit them in 3Q. We expect the product to

be approved in 4Q.

Establishing global value chain: Green Cross is building a global value chain that consists of

running blood collection centers (to secure plasma), operating plants to produce plasma derivatives,

obtaining approval to sell plasma derivatives, having plasma derivatives placed on the formulary lists,

and marketing and selling the products. The company has eight blood collection centers in the US

and seven in China, with plans to raise the respective numbers to 30 and 10 by 2020. The firm’s

Ochang plant #1 and facility in China produce plasma derivatives and have respective capacities of

0.7m and 0.3m liters pa. Its Ochang plant #2, completed in Aug 2016, has an annual capacity of

0.7m liters. Its plant in Canada with annual capacity of 1m liters is set to open in 2019. Green Cross’s

global blood derivatives business should take off once IVIG-SN obtains FDA approval. The company

aims to boost its exports of plasma derivatives and lift its export portion of sales from 10% in 2011

and 20% in 2016 to 30% in 2020.

Contents


p2


p7


p32


p52



p87

Company p105

Healthcare

2017. 6. 15

69

Green Cross: Plasma business strategic roadmap


Green Cross: Plan to integrate local operations into global plasma business


Healthcare

2017. 6. 15

70

Kolon Life Science to commercialize Invossa in Korea

Invossa approval imminent: Kolon Life Science is developing Invossa, a cell-mediated gene

therapy for degenerative osteoarthirists. The company plans to launch the drug domestically in

September if it obtains approval in June. As a single-dose treatment injected near the knee, Invossa

allows patients return to daily life after 30-60 minutes, a highly convenient option vs gene therapies

requiring surgery. The drug should be ideal for patients that did not respond to other drugs, or early-

phase patients unsuitable for surgery.

The results of the Phase III Korean trial involving 163 patients showed that International Knee

Documentation Committee (IKDC) scores—a measure of knee pain and activity—improved by 15.1

(from 40.3 to 55.4) for those taking Invossa over the 12-month period, exceeding the performance of

a placebo by three times (from 39.6 to 44.6). Invossa also proved superior to placebo in improving

visual analog scale (VAS) pain scores by 24.5 (vs 0.3 for placebo). Changes in Western Ontario and

McMaster Universities Osteoarthritis Index (WOMAC) scores were significant after 12 months, with

a mean change of -13.9 with Invossa and -6.2 with a placebo. Phase II US trials, performed over a 24-

month period showed that a single-dose injection has an efficacy lasting two years.

Looking to put Invossa on formulary list, expand capacity: Kolon Life Science priced

Invossa at KRW4m-5m per dose in the domestic market. Of the nation’s 5m degenerative

osteoarthritis patients, 2m of them are target customers in phase 2 or 3. The company aims to raise

the number of patients taking the drug from an estimated 1,700 this year to 10,000 in 2018. The firm

entered a marketing partnership with Mundipharma and Kolon Pharma, with the former partner

responsible for general hospitals and the latter for general practitioners. Its capacity is currently at

10,000 doses but is scheduled to reach to 100,000 doses by 2020. In Nov of last year, Kolon Life

Science out-licensed Invossa’s marketing rights in Japan to Mitsubishi Tanabe for KRW498.9b

(including KRW27.3b upfront) plus royalties in the double digits. Under the 10-year deal, KLS

retains the rights to manufacture and supply Invossa. Of note, 50% of the company’s upfront and

milestone payments will be passed on to original developer TissueGene. Mitsubishi Tanabe plans to

make IND applications for Phase II and Phase III trials this year, simultaneously proceed with Phase

II and Phase III trials thereafter, and gain Japanese regulatory approval in 2023.

Invossa’s Phase III trials in Korea: IKDC scores Invossa’s Phase III trials in Korea: VAS scores

Source: Kolon Life Science, Samsung Securities Source: Kolon Life Science, Samsung Securities

0.0 2.5

8.6

12.9 13.3

15.1

4.9 5.4

6.9 7.5

5.0

0

2

4

6

8

10

12

14

16

Baseline 1 month 3 months 6 months 9 months 12months

Dosage group Placebo group

(Pts)

0.0

(12.7)

(17.2)

(22.3) (23.4) (24.5)

(14.1)(12.8)

(14.6)(13.3)

(10.3)

(30)

(25)

(20)

(15)

(10)

(5)

0

Baseline 1 month 3 months 6 months9 months 12months


(Pts)

Healthcare

2017. 6. 15

71

Genexine likely to release positive Phase II trial results

Genexine, a biotech firm specializing in immune and metabolic disease treatment drugs, owns hybrid

Fc fusion protein and DNA vaccine platform technology. The company has six candidates under

Phase II trials and two under Phase I trials. The firm has inked technology alliances with large, Asian

pharmaceutical firms such as Simcere, Tasly, Fosun, and Kalbe.

Likely to release positive phase II trial result for GX-H9: Genexine is developing GX-H9

(hGH-hyFc), an innovative, long-acting recombinant hGH utilizing novel hyFc (hybrid Fc)

technology and intended for once-weekly or twice-monthly administration. The global hGH market

is likely to expand from USD3.5b in 2013 to USD4.7b in 2018, consisting of the pediatric growth

hormone deficiency (86%) and adult growth hormone deficiency (14%) segments. Handok and

Genexine in Jun 2012 signed a technology transfer and joint development contract for GX-H9 and

agreed to split profits equally. The US FDA on Nov 16, 2016 granted GX-H9 an orphan drug

designation for the treatment of growth hormone deficiency, which qualifies the firm for a seven-year

monopoly in that nation. Genexine on Apr 1 at the annual Endocrine Society meeting 2017 released: 1)

positive interim Phase II results regarding impacts on pediatric height; and 2) final Phase II results

for adults. The former relates to data obtained from 24 patients, or 50% of total enrollment, for three

months of the total six months of treatment. Key conclusions from the interim analysis include mean

annualized height velocities of 12.7cm for the once-daily dose; 12.4cm for twice-monthly dose

(receiving 2.4mg/kg), and 10.7 cm and 15.3 cm for the two weekly doses of a respective 0.8 mg/kg

and 1.2mg/kg.

Final Phase II results for the trial on children should be available in Sep 2017, and are likely to

outperform results of rivals. The mean annualized height velocities at six months were 13.4cm for

Pfizer/Opko Health’s MOD-4023, 8.5cm for Versartis’s VRS-317, and 12.9cm for Ascendis’ ACP-001,

with all of those drugs currently under Phase III trials.

GH-H9 vs rival products: Pfizer and Opko Health in Dec 2014 entered into an USD570m

agreement to develop and commercialize the latter’s long-acting hGH MOD-4023 (hGH-CTP) based

on carboxy-terminal peptide. Opko Health received USD295m upfront and should bring in a

USD275m milestone when the drug is approved. The drug is now in Phase III trials. The drug’s low

viscosity makes it easy to develop, but developing a long-acting formulation—beyond its current

once-a-week product—has proven to be difficult. Versartis’s VRS-317 is a long-acting hGH based on

XTEN technology. It is a fusion protein found in E. coli and derived by combining XTEN1 and

XTEN2 with n- and c-terminals. That solubility rises in line with a hike in hydrophile is positive, but

it has limitations such as reduced efficacy, side effects related to the immune system, and difficulties

relating to developing treatments for children. Ascendis Pharma’s ACP-001 is a long-acting hormone

based on TransCon PEG hGH. Because of the use of a polyethylene glycol (PEG), the drug has

limitations related to formulation and toxicity. Novo Nordisk’s NNC-0195-0092 (Phase II) is a hGH

conjugated with an albumin binding moiety. Novo Nordisk dominates the world’s once-daily dose

hGH market, but limitations exist for the product due to the non-specific binding of albumin and

hGH.

Healthcare

2017. 6. 15

72

Genexine to start Phase Ib/IIa trials for GX-188E DNA therapeutic vaccine: Genexine is

developing GX-188E (HPV16/18 DNA vaccine), a first-in-class DNA therapeutic drug targeting the

high-risk HPV types 16/18 associated with persistent infection responsible for cervical intraepithelial

neoplasia, cervical cancer, and head and neck cancer. Rival Inovio’s Phase II trial results for VGX-

3100 showed that histological regression to CIN 1I or normal pathology was observed in 49.5% of the

VGX-3100 and 30.6% of the placebo recipients. Complete regression was recorded in 40.2% of the

VGX-3100 and 14.3% of the placebo recipients. Meanwhile, Merck on Nov 11, 2016 announced that it

will test its cancer-fighting checkpoint inhibitor Keytruda in combo with Genexine’s cancer vaccine,

GX-188E, in HPV-induced cancers. According to FiercePharma, Keytruda sales hit USD1.42b in 2016

and should hit USD6.56b in 2022. Genexine and Merck plan to initiate Phase Ib/IIa trials for the

Keytruda and GX-188E combo involving 40 subjects in 1H17.

Genexine: R&D pipeline

Platform

technology

Project

Indication

Discovery

Pre-

clinical

Phase

I

Phase

Ib/2a

Phase

II Note

hyFc

GX-H9 LA* growth

hormone

Pediatric GHD** Adult GHD**

GX-E2 LA EPO Anemia GX-G3 LA G-CSF

Chemotherapy induced

neutropenia

GX-I7 LA IL-7 HPV persistent infection Tumor

GX-G6 LA GLP-1 Diabetes GX-G8 LA GLP-2 Short bowel syndrome

Multi target

hyFc IO LA hyFc

Solid tumor Liver cancer Metabolic diseases

DNA

vaccine GX-188E

HPV

vaccine

CIN*** 2/3 CIN 3 Cervical cancer Combination with Keytruda (1H17)

Note: * LA (Long-acting)

** Growth hormone deficiency

*** Cervical intraepithelial neoplasia

Source: Genexine, Samsung Securities

Global daily growth hormone deficiency treatment market (2015)

Source: Company data, Piper Jaffray, Samsung Securities

Novo Nordisk(Norditropin):

1,173

Sandoz(Omnitrope):

772 Pfizer(Genotropin):

617

Eli Lilly(Humatrope):

312

Merck(Saizen):

292

Roche(Nutropin):

213

Healthcare

2017. 6. 15

73

Genexine: Long-acting growth hormone competitors

Item Category LG Life Sciences Genexine Versartis Ascendis OPKO (Pfizer) Novo Nordisk

Listing status n/a Kosdaq Nasdaq Nasdaq Nasdaq CSE

Ticker n/a 095700 KS VSAR US ASND US OPK US NOVOB DC

Product Eutropin Plus/

Declage GX-H9 VRS-317 ACP-001 MOD-4023 NN8640

Technology Sustained release hyFc XTEN TransCon PEG CTP Albumin

Development

stage

Adult Launched Completed

Phase II

Completed

Phase II

Completed

Phase II

Failed

Phase III Phase III

Pediatric Launched Phase II Phase III Phase III Phase III Phase II

Orphan

drug

designation

n/a Designated by

US FDA

Designated by

US FDA and

EMA

n/a

Designated by

US FDA and

EMA

n/a

Efficacy

Adult

(IGF-1)

All within

± 2 SDS

(GH 0.1-0.3mg/

kg)

98.4% SDS

≥ 2 SDS

(GH 0.05-0.8 mg/

kg)

Completed

Phase II

88.1% within

± 2 SDS

(Individual dose)

All within

± 2 SDS

(2.0-8.0mg/

week)

Pediatric

(height)

0.8mg/kg:

10.7cm

(3 months)

1.2mg/kg:

15.3cm

(3 months)

2.4mg/kg:

12.4cm

(3 months)

8.5cm

(6 months)

8.1cm

(1 year)

7.8cm

(2 year)

12.9cm

(6 months)

13.4cm

(6 months)

10-11.5cm

(1 year)

7.6-8.7cm

(2 year)

No data yet

Injection

volume<1ml ✓ ✓ X ✓ ✓

Safety

criteria

Undisclosed

(100s patients

on hyFc)

Immunogenicity

(ADA*)

Immunogenicity

(ADA)

Immunogenicity

(ADA) No data yet

CMC Genetic fusion Genetic fusion Chemical

conjugation Genetic fusion

Chemical

conjugation

Dosing

frequency Weekly

Weekly or semi-

monthly Semi-monthly Weekly Weekly Weekly

Note: * ADA: Anti-drug-antibody


Genexine: Overview of GX-H9 Phase II study design for pediatric patients

Category Details

Target Safety and tolerability, height velocity at 6 months

Design Randomized, open label, single dose/multiple dose study in drug naive pediatric patients with growth hormone deficiency

Arms Dosage group: 3 groups (N=48, 0.8 & 1.2mg/kg weekly, 2.4mg/kg twice monthly) Control group: Genotropin 0.03mg/kg daily

Dosing period Periodic injection for 6 months + 6 months extension + 12 months extension

Primary outcome Safety and tolerability, height velocity at 6 months

Secondary outcome PK and PD profiles and immunogenicity

Location 49 institutions in 15 countries (Europe and Asia)


Healthcare

2017. 6. 15

74

Genexine: GX-H9 Phase II study design for pediatric patients


Genexine

PK result in GX-H9 Phase II for pediatric patients PD result in GX-H9 Phase II for pediatric patients

Note: At single dose period



Healthcare

2017. 6. 15

75

Genexine: Interim GX-H9 Phase II height velocity from pediatric trials


Healthcare

2017. 6. 15

76

Qurient to out-license eczema cure Q301 in 2H17

Qurient specializes in allergy and infection treatments, and anti-cancer drugs. The company entered

alliances with Institut Pasteur Korea and Max Planck Institute/Lead Discovery Center to create a

global innovative new drug development network. Qurient develops candidates for innovative drugs

to satisfy unmet medical needs, engages in R&D activities, and out-licenses new drugs. Its R&D

pipeline includes a one candidate in Phase II clinical trials, one in Phase I trials, and three in pre-

clinical development.

Eczema cure Q301 to be out-licensed in 2H17: Qurient is developing Q301, a cure for eczema

(atopic dermatitis), the market for which should grow from USD4.57b in 2016 to USD5.63b in 2022.

Side effects of existing steroid- and calcineurin inhibitor-based treatments include toxic ones, making

long-term administration difficult—ie, there is an unmet medical need. The company’s Q301 is based

on Zyflo (zileuton, 5-lipoxygenase inhibitor), Abbvie’s asthma treatment. The firm has completed

Phase IIa clinical trials for patients with stage 3 or 4 eczema in Feb 2016. Pfizer acquired Anacor in a

May 2016 deal worth USD5.2b to secure Eucrisa (crisaborole), a phosphodiesterase 4 (PDE-4)

inhibitor. The company in Dec 2016 received FDA approval for the drug to treat mild to moderate

eczema in patients aged 2 to 79 years old. Eucrisa is the first eczema treatment released in 15 years

and is priced at USD580/60g (which translates to over USD2b in annual sales). Meanwhile, Sanofi

and Regeneron at end-Mar 2017 acquired FDA approval for Dupixent (dupilumab), an interleukin-4

(IL-4) and IL-13 inhibitor. Dupixent, priced at USD37,000 per year, should generate more than

USD4b in annual sales. Following a series of innovative eczema treatment releases by Pfizer and

Sanofi, Qurient should be able to out-licensee Q301 to the US and Europe in 2H17.

Q203 up for PRV from US FDA: Qurient is also developing Q203 (imidazopyridine amide), a

treatment for drug-resistant tuberculosis. We estimate the market for such a treatment in Russia,

China, and India at a combined USD780m. The drug (now in Phase Ib) at end-Dec 2015 received US

FDA designation as a cure for rare diseases, granting it seven years of exclusivity in the US market.

On completion of Phase II trials, the drug should obtain a greenlight for Phase III clinical trials and is

eligible for a priority review voucher (PRV). The FDA introduced the PRV program to encourage

development of cures for rare and/or neglected diseases. A PRV—which can be sold—allows firms to

have any one of their drugs reviewed under FDA’s priority review system, which offers a reviewing

period of six months. Over 2009-2017, 13 PRVs changed hands for a combined total of

overUSD200m. The firm has one out-licensing deal for Q203 (Russia) and expects to ink more deals

in Korea and Southeast Asia.

Healthcare

2017. 6. 15

77

Qurient: R&D pipelines

Project Indication Discovery Candidate Pre-clinical Phase I Phase II Phase III Note

Q301 Atopic

dermatitis

Completed

US Phase IIa ≈2019 Developed by Qurient

Q203 Tuberculosis

US

Phase

Ib

≈2019

Developed by Institut Pasteur

Korea and out-licensed to Qurient

Orphan drug designation by FDA

Q701

Drug resistant

cancer/immuno-

oncology

≈2017 ≈2018 Developed by Max Planck Institute

and out-licensed to Qurient

5LO inhibitor Asthma ≈2018 ≈2019 Developed by Qurient

CDK7 inhibitor Cancer ≈2018 ≈2019 Developed by Max Planck Institute

and out-licensed to Qurient


Atopic dermatitis treatment market outlook

Source: GlobalData ‘Atopic dermatitis - global drug forecast and market analysis to 2022’, Samsung Securities

Qurient: Q301’s Phase IIa results

Note: For 60 atopic dermatitis patients with IGA score 3 and 4

FDA recommended primary end point: IGA score 0 to 1 (clear to almost clear)


3,869 4,210

4,575 4,874

5,234 5,631

0

1,000

2,000

3,000

4,000

5,000

6,000

2012 2014 2016E 2018E 2020E 2022E

(USDb)

0

5

10

15

20

25

30

2 weeks 4 weeks 6 weeks 8 weeks


(Patients with IGA score 0 or 1 at week8, %)

(p=0.0249)

Healthcare

2017. 6. 15

78

PRV grant and use status

Year Drug Indication Company Status

2009 Coartem (artemether/lumefantrine) Malaria Novartis Used by Novartis

2012 Sirturo (bedaquiline) Tuberculosis Janssen (Johnson & Johnson) Unused

2014 Vimizim (elosulfase alfa) Morquio A syndrome BioMarin Sold for USD67.5m

2014 Impavido (miltefosine) Leshmaniasis Knight Sold for USD125m

2015 Cholbam Rare bile acid synthesis inhibitor Asklepion Sold for USD245m

2015 Unituxin (dinutuximab) High-risk neuroblastoma United Therapeutics Sold for USD350m

2015 Xuriden Hereditary orotic aciduria Wellstat Sold for undisclosed value

2015 Strensiq (asfotase alfa) Hypophosphatasia Alexion Unused

2015 Kanuma (sebelipase alfa) Lysosomal acid lipase Alexion Unused

2016 Vaxchora Cholera PaxVax Unused

2016 Exondys 51 (eteplirsen) Duchenne muscular dystrophy Sarepta Sold for USD125m

2016 Spinraza (nusinersen) Spinal muscular atrophy Biogen Unused

2017 Emflaza (deflazcort) Duchenne muscular dystrophy Marathon Unused

2017 Brineura (cerliponase alfa) Batten disease BioMarin Unused

Source: PriorityReviewVoucher.org, Samsung Securities

Healthcare

2017. 6. 15

79

Celltrion Healthcare, Tissuegene set for IPOs in 2H

Celltrion Healthcare on Mar 14, 2017 received an approval of a preliminary screening for its IPO on

the Kosdaq. According to press reports, the IPO price should be KRW33,300-41,000 per share (for a

market cap of KRW3.73t-4.6t), with the issuance of new shares to raise KRW819.3b-1.01t. The

projected price translates to 30.4x-37.4x 2016 P/E, and shares in the OTC market are currently at

KRW43,700 (for a market cap of KRW4.898t). The Korean Institute of Certified Public Accountants

(KICPA) on Mar 13, 2017 decided to conduct an in-depth audit of Celltrion Healthcare’s accounting

practices, pushing back the IPO schedule. KICPA raised questions over the timing of recognition of

interest income (of around KRW10.6b) related to the company’s contracts with overseas distribution

partners. Celltrion Healthcare submitted adjusted financial reports for 2015 on Mar 20. The audit

committee on Jun 1 released its findings which resulted in a light punishment.

Celltrion Healthcare submitted its IPO prospectus and plans to complete the listing by end-July.

Sales trends at the company’s global partners following its IPO in 2H17 should determine the

earnings and share prices at Celltrion.

Tissuegene is planning to apply a preliminary review for its IPO on the Kosdaq. The company is an

overseas entity and thus not subject to special treatments of the Kosdaq—eg, it does not have to

undergo a technology review. Still, the firm is known to have received an AA rating from Technology

Credit Bureau (TCB) for its biologics development capabilities. It plans to commence Phase III trials

of Invossa in the US after completing its IPO in 2H. The 24-month-long, double-blinded randomized

and controlled trial will enroll approximately 1,020 patients with osteoarthritis of the knee. It will

cost around KRW100b, with KRW30b funded by a loan and investment by the Korea Export-Import

Bank and KRW70b in proceeds from the IPO. The company expects to receive FDA approval for the

drug in 2023 as the first disease-modifying osteoarthritis drug marketed for treating osteoarthritis of

the knee.

Healthcare

2017. 6. 15

80

Healthcare firms expected to list in Korea in 2017-2018

(KRW)

Company

Technology

evaluation

IPO

eligibility

Estimated

IPO date

Underwriter IPO price band

(final IPO price;

oversubscription rate)

Total number

of shares

(post-IPO)

Estimated

market cap

(KRWb)

OTC

(or Konex)

price

OTC (or Konex)

market cap

(KRWb)

Share

price)

Market

cap

(KRWb)

2017

Eubiologics Qualified Qualified Jan 24 Korea I&S 6,000-6,800 (6,000; 10.5:1) 24,135,986 144.8-164.1 4,170 102

PCL Qualified Feb 23 Korea I&S 10,500-13,000 (8,000; 2.0:1) 8,876,164 93.2-115.4 6,230 56

Shinshin Pharm Qualified Feb 28 KB I&S 5,900-6,700 (4,500; 72.5:1) 15,073,000 88.9-101.0 8,730 132

Dentium Qualified Mar 15 NH I&S 45,000-50,000 (32,000; 364:1) 11,068,830 498.1-553.4 37,450 415

Astar Qualified Qualified Mar 20 Kiwoom Securities 13,000-18,000 (8,000) 9,350,023 121.6-168.3 7,300 69

Chemon Qualified Apr 11 eBEST I&S 2,000 61,154,524 124.3 1,640 102

Abclone Qualified Filed 2017 NH I&S 17,500 106

Humasis Filed 2017 HI I&S

Celltrion Healthcare Qualified 2017 MiraeAssetDaewoo 33,300-41,000 3,732-4,595 43,700 4,898

TissueGene 2017 NH I&S

Dongkoo Bio&Pharma 2017 NH I&S

Olix 2017 NH I&S

Gencurix 2017 Kiwoom Securities 14,900 69

iCure 2017 Kiwoom Securities 21,500 105

2018

Celemics 2018 Kiwoom Securities

General Bio 2018 Kiwoom Securities

Cellid 2018 Samsung Securities

Vivozon 2018 Samsung Securities

Ybiologics 2018 Korea I&S

ABL Bio 2018 Korea I&S

SCM Life Science 2018 Korea I&S

Kainos Medicine 2018 Korea I&S 4,995 58

L&C Bio 2018 Korea I&S

Kolon Pharmaceutical 2018 Korea I&S

Eone-diagnomics 2018 Dongbu Securities

Aribio 2018 NH I&S

CJ Healthcare 2018 NH I&S

SK Biopharmaceutical 2018

SK Biotek 2018

Medizen Humancare 2018 9,390 22

Note: As of May 26 close

Source: KIND, 38 Communication, QuantiWise

Healthcare

2017. 6. 15

81

Major issues involving pharmaceutical SMEs and API makers

Viread and Tamiflu generics to launch in 2H after related patents expire

Viread to go off patent in Nov 2017: Outpatient prescription sales of Gilead’s hepatitis B

treatment Viread (tenofovir) grew 23% y-y to KRW154.1b in 2016, becoming the second biggest item

in the domestic prescription drug market. Sales hit KRW39.9b in 1H17, taking top spot from Pfizer’s

hyperlipidemia treatment Lipitor (atorvastatin). With Viread to go off patent on Nov 9, 2017 (in

terms of drug substance) and in Nov 2018 (in composition), around 20 pharmaceutical companies

plan to launch generics in Nov 2017 (provided they overcome the composition patent by winning

related lawsuits). Of note, outpatient prescription sales of BMS’s hepatitis B treatment Baraclude

(entecavir), which went off patent in 2015, plunged by around 50% from KRW193.1b in 2014 to

KRW97.4b in 2016. We thus expect top-tier pharmaceutical SMEs, which are set to launch Viread

generics, to see sales grow.

Tamiflu to lose patent protection in Aug 2017: Sales of Roche’s Tamiflu (oseltamivir) hit

KRW59.1b in 2016 (up 95% y-y), their highest figure since the drug launched in 2001. Tamiflu is an

anti-viral used to treat and prevent influenza A and B. Hanmi Pharm’s Hanmiflu is a supergeneric,

which launched in Korea on Feb 27, 2016 after having avoid the salt patent on original Tamiflu.

Hanmiflu sales reached KRW14.8b in 2016, and the drug’s share of the prescription market hit 54.9%

in the first week of Dec 2016 (topping Tamiflu’s shares) after Korea’s health authorities issued a flu

warning early in the month. When the Tamiflu salt loses patent protection on Aug 23, 2017, some 30

pharmaceutical companies are expected to launch generic versions. The flu treatment market grew to

KRW74b in 2016 thanks to the influenza pandemic last year. Influenza antiviral drug shortages

during the pandemic has led to an increase in demand for steady inventories, which bodes well for

further growth.

Export markets to expand; global clinical trials to start; to add overseas customers in 2H

Boryung, Ilyang to export in-house-developed new drugs to more countries in 2H:

Boryung Pharmaceutical should begin exporting its in-house-developed hypertension drug Kanarb

(fimasartan) to Russia and Southeast Asia in 2017. Although such exports should have little impact

on the firm’s overall sales, we are encouraged that the firm is adding exports destination markets

(having only exported to Mexico last year). The company should land more export contracts for

Kanarb-based combination drugs Dukarb (fimasartan + amlodipine) and Tuvero (fimasartan +

rosuvastatin), both of which launched in 2016. Meanwhile, Ilyang Pharmaceutical should begin

initial shipments of its in-house-developed gastroesophageal reflux disease treatment Noltec and

leukemia treatment Supect to Latin America and the Middle East. Noltec is increasing its share of the

domestic proton pump inhibitor (PPI) market, and its Supect sales have been increasing gradually

since the drug was approved as a first-line chronic myeloid leukemia treatment at end-2015. Rising

sales of high-margin, in-house-developed new drugs should contribute to longer-term profitability

improvement.

Huons to start global trials for BTX and new eye drop for dry-eye syndrome in 2H:

Huons should begin Phase 3 clinical trials for its BTX Hutox in Korea and the US in 2H17. It plans to

launch the product in Korea in early 2019 and the US possibly as soon as 2020. Having obtained an

export license in Aug 2016 from Korea’s Ministry of Food and Drug Safety, Huons commenced

exports of Hutox to Southeast Asia, the Middle East, and Latin America in Oct 2016. Hutox exports

hit KRW2.3b in 4Q16 and should grow to KRW12b in 2017. Meanwhile, Huons plans to begin Phase

2 clinical trials for its in-house-developed eye drop for dry-eye syndrome in 2H17. Rising costs

associated with trials should drive operating profit down this year, but shares should enjoy significant

momentum from the firm’s entry into the fast-growing BTX market and late-phase clinical trials

overseas.

Healthcare

2017. 6. 15

82

Key issues for medical aesthetics sector

Hugel to beef up global operation in 2H with newly raised capital

Tapping into global network: Hugel on Apr 17 signed a term sheet with Bain Capital outlining a

deal that would grant control to the global top-ten private equity fund. Considering Bain Capital’s

extensive global network and management capability, Hugel’s overseas strategy stands to benefit.

Hugel earned KRW454.7b in proceeds from the deal, which it should use to: 1) strengthen its

distribution network in the US by securing a global pharma as a partner; 2) establish local

subsidiaries and acquire local distributors in key markets, thus helping boost its ASP; and 3) increase

its stake in filler-making subsidiary Across, thus boosting its net margin (attributable to controlling

shareholders).

Expected to sign BTX supply deal with US multinational pharma: Hugel plans to take

back US sales rights for its Botulax (a glabellar line treatment) from Croma Pharmaceuticals, its

business partner in North America, Europe, and Australia, and sign a new contract with a new

multinational. The firm needs KRW100b to terminate the deal with Croma, which is currently

conducting Phase III trials for Botulax in the US and Europe (involving 90 subjects). Considering

Bain Capital’s global network and the BTX market’s solid growth, we expect many multinationals to

show interest in acquiring the rights. We expect Hugel to sign a Botulax supply contract with a US

pharmaceutical company in 2H. In Europe, considering the capability of Stada, Germany’s third

largest generic firm (which Bain Capital took over in April), Hugel has likely already secured an

extensive distribution network there.

To make acquisitions to establish direct overseas network: Hugel distributes products via

partners in each country—at a price that is just half what physicians pay to distribution firms. Thus, if

the firm can secure a direct distribution network with physicians, its ASP could double. Hugel plans

to acquire overseas distribution firms that have strong relationships with plastic surgery clinics or

pharmaceutical companies—a move that should boost its profitability over the longer term.

To increase stake in subsidiary Across: Across is Hugel’s filler-maker subsidiary (52.2%

stake). In 2016, Across saw sales, operating profit, net profit, operating margin and net margin rise

34.7%, 36.9%, 40.8%, 1%pt, and 2.3%pts y-y, respectively, to KRW30.9b, KRW18.4b, KRW16.4b,

59.4%, and 53.2%. Hugel announced that it will use some of the proceeds from its deal with Bain

Capital to increase its stake in Across. This should dissipate concerns that the stake in the subsidiary

will be diluted if Across goes public in 2018. The stake expansion should also boost Hugel’s net

margin attributable to controlling interests. Considering the potential synergies between BTX and

filler products, Bain Capital is unlikely to take Across public. Hugel’s financial statement has the

following footnote, ‘Hugel must collaborate with Across’ second-largest shareholder STIC Investment

(19.3%) and take all reasonable measures to take Across public by Sep 2019. If Hugel violates this,

STIC Investment has the right to request Hugel buy all or some of its stake in Across’. This indicates

that Hugel may have to acquire some or all of STIC Investment’s stake in Across.

Medytox’s capacity shortage to be resolved in 2H

Earnings momentum strong; plant #3 wins domestic approval: Medytox partially

resolved its capacity shortage issue, as its #3 plant on Dec 19, 2016 won KGMP and export approval.

Currently, the firm ships output from its #3 plant to nations that do not require separate approval,

such as Japan and some countries in Southeast Asia and Latin America. As the plant’s output

recently won domestic approval, the firm’s BTX capacity shortage should be fully resolved in 3Q.

Healthcare

2017. 6. 15

83

Major issues in medical-device industry

Measures to expand dental implant insurance coverage to become visible in 2H

Concerns over slowing growth in domestic implant market to ease: On the campaign

trail, Moon Jae-in—now president—pledged to: 1) lower per-tooth implant costs for patients from

KRW600,000 to KRW300,000; and 2) gradually increase the number of teeth subject to implant

coverage (from two currently). We expect follow-ups to these pledges to become visible in 2H. With

implant coverage having expanded steadily (from those aged 75 and over in Jul 2014 to those aged 70

and over in Jul 2015 to those aged 65 and over in Jul 2016), the combined domestic implant sales of

Osstem Implant, Dentium, and Dio hit KRW112b in 2014 (up 14% y-y), KRW141.4b in 2015 (up 26.2%

y-y), and KRW169.9b in 2016 (up 20.2% y-y). We expect this figure to hit KRW191.6b in 2017 (up

12.8% y-y) and KRW211.6b in 2018 (up 10.4% y-y), which figures are subject to upwards revisions if

the president follows through on his campaign pledges. We estimate that the domestic implant

market will grow 15-20% pa over the next two to three years if insurance coverage expands.

Vieworks to land dynamic detector supply contracts in 2H

Vieworks to be world’s third firm to commercialize TFT-based dynamic detectors:

Dynamic detectors are indispensable for radiography fluoroscopy (used in gastrointestinalgraphy,

angiography, and C-arm for noninvasive anesthesia or orthopedic surgeries) and computed

tomography (CT). Like detectors that generate still images (eg, flat panel-digital radiography

detectors: FP-DRs), those that generate moving images (RF) can also be classified into CMOS and

TFT. In the past, when TFT detectors could not produce high-resolution images with small doses of

radiation, CMOS detectors were widely used for their fast retakes. However, recent advances in TFT

detector technology have minimized image noise, allowing high-resolution images at low radiation

doses. Also, TFT’s lower cost per area (vs CMOS) makes them more suitable for large-area imaging.

We expect TFT-based dynamic detectors to become the gold standard in fluoroscopy and the CT

market. Currently, Varex Imaging and Trixell are the only companies that have commercialized TFT-

based dynamic detectors. We find the dynamic detector market more attractive than the FP-DR

market given less downward pressure on ASPs. Vieworks in 2H should become the third company in

the world to commercialize TFT-based dynamic detectors. The global dynamic detector market is

estimated to be sized at KRW300b-KRW400b and should grow approximately 5% pa through 2020.

Dynamic detectors to serve as another cash cow within three years: Vieworks

completed development of dynamic detectors early this year and is known to be in talks to supply

products to a number of radiography fluoroscopy (RF) system companies. The global RF system

market is controlled by General Electronics, Siemens, and Philips. Admittedly, it is difficult for a

detector manufacturer (other than Varex Imaging, Trixell, and Canon) to win supply contracts with

major system firms. However, we believe Vieworks has a strong chance of landing B2B supply

contracts in 2H given that: 1) it has a track record of more than five years in the FP-DR market; and 2)

only two companies have so far managed to commercialize TFT-based dynamic detectors. Our

earnings model currently has Vieworks’ dynamic detector sales (including CCD-RF) hitting

KRW9.9b in 2017 (up 106.4% y-y) and KRW21.8b in 2018 (up 120% y-y)—figure we believe to be

conservative given that the firm’s FP-DR sales hit KRW14.9b in their first year rose 97.1% to

KRW29.5b the following year. Dynamic detectors should bolster profitability, as they have ASPs 1.5x

those of still-image detectors but similar COGS. If the firm signs a large supply contract for dynamic

detectors, it will dissipate concerns over slower growth in still-image detector sales.

Healthcare

2017. 6. 15

84

Global fluoroscopy market C-arm system

Source: Global Industry Analysis

Source: Industry data

Global CT market Computed tomography (CT)

Source: Global Industry Analysis

Source: GE Healthcare

Global C-arm market breakdown Vieworks: RF detector sales

Source: Global Industry Analysis Source: Company data, Samsung Securities estimates

GE Healthcare:

71%

Siemens:11%

Medtronic:8%

Philips:6%

Ziehm:4%

(40)(20)020406080100120140

0

5

10

15

20

25

2014 2015 2016E 2017E 2018E

(% y-y)(KRWb)

RF detector sales (LHS)

Sales growth (RHS)

1.81

2.40

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015 2020E

(USDb)

CAGR 2015-2022E: +5.8%

4.89

6.89

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2015 2022E

(USDb)

CAGR 2015-2022E: +5.0%

Healthcare

2017. 6. 15

85

Vatech to obtain China approval for Green Smart in 3Q

China’s dental x-ray imaging systems market growing quickly: China’s dental x-ray

imaging systems market—worth USD220m in 2015—is set to grow at a 2015-2020 CAGR of 15.6%.

Leading global players have an oligopoly in China: Dentsply Sirona, Vatech, and Hefei Meiya

Optoelectronic Technology each have 20% of the market (in terms of volume), while Planmeca,

Carestream, and Danaher have 10-15% apiece.

Sales contribution from China subsidiary surge in 2016: Vatech’s sales in China reached

KRW15.4b in 2015 but rose only 16.8% y-y to KRW18b in 2016. Sales at its Chinese subsidiary surged

119.3% y-y to KRW16.4b in 2016, partly because the parent handed over its sales business to the

subsidiary, but mainly thanks to surging sales of Green 3D, which received local sales approval in

2Q16. If Green Smart receives approval in 3Q17, Vatech’s China sales should further accelerate. The

China subsidiary is eligible to manufacture Green 2D (approved in 2H14) but should soon win

approval to manufacture Green 3D as well.

Green Smart makes a splash: In Sep 2014, Vatech launched its Green Smart imaging system

(formerly PaX-i3D Smart) domestically, and despite using just two x-ray detectors—for panoramic,

CT, and cephalometric imaging—the device can produce 2D and 3D images on par with those

generated by CBCT systems that require three detectors. This means the system’s detectors cost just

two-thirds those of CBCT systems, so the system’s ASP is also lower. While Vatech’s regular 3D

imaging systems is priced at USD50,000-60,000/unit (10-20% lower than rivals’ offerings), the

Green Smart system sells for USD40,000/unit. In addition to price competitiveness, Green Smart

requires only one round of filming to capture 2D and 3D images—whereas CBCT systems require two

rounds of filming to accomplish this—which increases convenience for users and patients. Green

Smart was central to Vatech’s domestic market share, which jumped from 50-60% in 1H14 to 78% by

end-2015.

Export growth for Green Smart strong: Green Smart made a significant contribution to

Vatech’s domestic top-line growth. In 2H15, the firm began to export it to Europe (after having

obtained CE approval in 3Q15), where it made KRW8.4b in sales in that half. Exports shot up 263.6%

y-y to KRW30.6b in 2016, backed by US-bound shipments from 2Q16. The Green Smart portion of

Vatech’s 3D imaging device exports leapt from 26% in 2H15 to 40% in 2016.

Green Smart approval to take China sales to new heights: Competitively priced, Green

Smart mainly targets buyers in China and other EMs who have relatively low purchasing power.

Green Smart is dominant in Korea—which has the world’s highest CBCT system penetration—and

the system should be a hit in China once its sale is approved in 3Q. We expect Vatech’s 3D imaging

device exports to jump 26% this year to KRW96.4b.

Healthcare

2017. 6. 15

86

China: Dental imaging system sales volume China: Intraoral sensor sales volume

Source: Vatech

Source: Vatech

Vatech: PaX-i3D Smart sales Vatech: Product approval status

Product Korea US Europe China

Green 2D 1Q12 1Q12 1Q12 2H14 (sales)

2H14 (production)

Green 3D 3Q12 2Q13 3Q12 2Q16 (sales)

2018E (production)

Green Smart 3Q14 4Q15 (approval)

2Q16 (launch) 3Q15

2H17E (sales)

2018E (production)

IOS (bendable) 4Q14 3Q15 2Q15 2Q17E

Source: Vatech, Rayence

Source: Company data,

1,400 1,650 1,750

2,000 2,400

1,050

1,300 1,320

1,340

1,340

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2015 2016E 2017E 2018E 2019E

(Units)

3D 2D

2,450

2,9503,070

3,340

3,740

3,700 4,000 4,300 4,600

3,200 3,500

4,000 4,600

1,100 1,300

1,600

1,900

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2015 2016E 2017E 2018E

(Units)

IOS IOX PSP

8,0008,800

9,90011,100

9.4

24.9 21.6

8.4

30.6

0

10

20

30

40

50

60

2014 2015 2016

(KRWb)

Domestic Overseas

2014.9 Korea launch

2015.9 Europe launch

2Q16 US launch

Healthcare

2017. 6. 15

87


2H sector outlook

Base effect, cost savings for big firms; bio exports, medical-aesthetics demand to rise

Covered healthcare firms to see solid growth in sales, operating profit: We expect our

covered healthcare firms this year to see their combined sales, operating profit, and net profit

attributable to controlling shareholders grow 14.1%, 47.9%, and 76,9% y-y, respectively, to KRW10.8t,

KRW1.6t, and KRW1.3t. The table below shows a breakdown of these metrics for each segment.

Covered healthcare firms: 2017 forecasts at a glance

(KRWb)

Large

pharmas

Pharma

SMEs

Biotech Medical

aesthetics

Medical

devices

Diagnostics Coverage

Sales 6,392.3 1,241.8 1,332.7 373.3 1,130.2 305.8 10,776.1

Operating profit 434.3 171.1 496.1 209.8 210.8 62.3 1,584.5

Net profit attributable to controlling interests 346.4 186.8 326.7 155.9 213.7 48.4 1,277.9

Growth (% y-y)

Sales 7.6 11.7 52.8 45.0 12.2 21.0 14.1

Operating profit 32.9 12.6 123.2 51.6 15.6 26.5 47.9

Net profit attributable to controlling interests 10.9 100.4 632.6 52.1 65.0 20.6 76.9


The biotech and medical-aesthetics segments should enjoy the strongest earnings momentum.

Biotech profit growth should be bolstered by growing US sales of Remsima for Celltrion; improved

utilization at Samsung Biologics’ second plant; and narrowing losses at Samsung Bioepis. Profit

growth in the medical-aesthetics segment should be driven by Medytox starting shipments from its

third plant; and Hugel increasing exports, taking advantage of a steadily growing global BTX/filler

market.

Medical aesthetics in 2Q, big-pharmaceuticals and biotech in 2H: The medical-aesthetics

sector enjoyed a strong performance in 1Q, and this should be repeated in 2Q, with operating profit

growing 49.6% y-y. In 2H, the large-pharmaceutical and biotech sectors should post pronounced

operating profit growth of 39.3% and 124.8% y-y, respectively, on: 1) a low base—from Hanmi’s

earnings shock after its out-licensing contract with Sanofi was revised down—and SG&A cost

controls in 2017; and 2) aggressive exports of Korea-made biosimilars to developed markets.

Contents


p2


p7


p32


p52



p87

Company p105

Healthcare

2017. 6. 15

88

Healthcare coverage: Annual results and forecasts

Note: Using parent financials for Celltrion, SK Chemicals, Donga ST, and i-Sens

Source: QuantiWise, Samsung Securities estimates

Healthcare coverage: Quarterly results and forecasts



0

2

4

6

8

10

12

14

16

18

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E


(KRWb) (%)

0

4

8

12

16

20

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E


(KRWb) (%)

Healthcare

2017. 6. 15

89

Large pharma coverage: Annual results and forecasts SME coverage: Annual results and forecasts

Note: Yuhan, Green Cross, Hanmi Pharmaceutical, Chong Kun Dang

Pharmaceutical, Donga ST (parent), and SK Chemicals (parent)

Note: Boryung Pharmaceutical, Ilyang Pharmaceutical, Daewon

Pharmaceutical, and ST Pharm

Biotech coverage: Annual results and forecasts Medical aesthetics coverage: Annual results & forecasts

Note: Celltrion (parent), and Samsung Biologics (from 2011)

Note: Medytox and Hugel

Medical-device coverage: Annual results and forecasts Diagnostics coverage: Annual results and forecasts

Note: Osstem Implant, Dio, Vieworks, Vatech, and Rayence


Note: Seegene, i-Sens (parent), and Boditech Med


0

10

20

30

40

50

60

70

0200400600800

1,0001,2001,4001,6001,8002,000

2009 2011 2013 2015 2017E

Sales (LHS)

Operating profit (LHS)

Operating margin (RHS)

(KRWb) (%)

0

10

20

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2009 2011 2013 2015 2017E

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02468101214161820

0

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2009 2011 2013 2015 2017E

Sales (LHS)



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Sales (LHS)



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Healthcare

2017. 6. 15

90

Large pharma coverage: Quarterly results and forecasts SME coverage: Quarterly results and forecasts

Note: Yuhan, Green Cross, Hanmi Pharmaceutical, Chong Kun Dang

Pharmaceutical, Donga ST (parent), and SK Chemicals (parent)

Note: Boryung pharmaceutical, Ilyang Pharmaceutical, Daewon

Pharmaceutical, and ST Pharm,

Biotech coverage: Quarterly results and forecasts Medical-aesthetics coverage: Quarterly results & forecasts

Note: Celltrion (parent), and Samsung Biologics (from 2011)

Note: Medytox and Hugel

Medical-device coverage: Quarterly results and forecasts Diagnostics coverage: Quarterly results and forecasts

Note: Osstem Implant, Dio, Vieworks, Vatech, and Rayence


Note: Seegene, i-Sens (parent), and Boditech Med


012345678910

0200400600800

1,0001,2001,4001,6001,8002,000

1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS)



(KRWb) (%)

02468101214161820

050

100150200250300350400450

1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS)



(KRWb) (%)

05101520253035404550

0

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1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

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(KRWb) (%)

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54

56

58

60

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140

1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

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1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

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1Q16 3Q16 1Q17 3Q17E 1Q18E 3Q18E

Sales (LHS)



(KRWb) (%)

Healthcare

2017. 6. 15

91

Healthcare coverage: 2017 sales growth forecasts



Healthcare coverage: 2017 operating profit growth forecasts



6.7 14.0

3.7 4.4 3.3 8.8

49.5 54.5

22.8 19.4 22.3 13.8 13.5 13.0

3.4

18.8 17.7 23.7 26.6

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Large pharmas Biotech Diagnostics SMEs Medical devices Medicalaesthetics

(% y-y)

4.3 25.9

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11.2

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22.8 To turn pos

89.3 60.5

10.2 34.3 40.4

23.5 19.2

(1.0)

28.7 17.8 27.2 31.9

(13.9)

15.6 33.3

73.3

(50)

0

50

100

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200

Gre

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Yu

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Large pharmas Biotech Diagnostics SMEs Medical devices Medicalaesthetics

(% y-y)

Healthcare

2017. 6. 15

92

Healthcare coverage: Results and forecasts (1)

(KRWb) Company 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2016 2017E 2018E

Large

pharmas

Green

Cross

Sales 245.8 303.5 327.6 321.0 275.4 316.0 357.5 329.4 1,197.9 1,278.3 1,342.4

Growth (% y-y) 14.7 13.1 11.0 18.9 12.0 4.1 9.1 2.6 14.3 6.7 5.0

Operating profit 10.9 24.0 34.6 9.0 13.7 21.5 45.1 1.6 78.5 81.8 85.2

Growth (% y-y) (14.4) (20.5) (28.2) 1,466.5 25.9 (10.7) 30.4 (82.2) (14.4) 4.3 4.1

Net profit* 5.3 16.1 22.4 19.2 4.6 15.5 34.0 2.2 63.0 56.4 60.8

Growth (% y-y) (57.6) (43.1) (60.9) nm (12.7) (3.5) 52.0 (88.4) (33.7) (10.5) 7.9

Yuhan

Sales 276.5 332.7 361.8 349.8 351.2 370.8 396.5 386.6 1,320.8 1,505.1 1,620.7

Growth (% y-y) 14.2 22.4 16.1 15.4 27.0 11.4 9.6 10.5 17.0 14.0 7.7


Growth (% y-y) 33.4 (4.0) (20.4) 106.5 78.4 15.4 13.5 9.2 13.9 25.9 8.7

Net profit* 51.3 34.1 24.1 51.8 29.5 40.6 47.4 43.5 161.2 161.0 175.6

Growth (% y-y) 108.1 10.1 (46.4) 102.7 (42.5) 19.3 96.9 (16.1) 27.9 (0.1) 9.1

Hanmi

Pharmaceutical

Sales 256.4 234.5 219.7 172.1 233.5 231.4 221.9 228.1 882.7 915.1 950.6

Growth (% y-y) 19.4 (4.1) (18.1) (70.8) (8.9) (1.3) 1.0 32.6 (33.0) 3.7 3.9

Operating profit 22.6 6.4 13.8 (16.0) 31.4 14.4 15.1 15.4 26.8 76.2 88.0

Growth (% y-y) 968.7 161.3 (61.5) nm 39.0 124.7 9.4 nm (87.4) 184.5 15.5

Net profit* 38.1 20.1 4.8 (39.6) 18.9 9.3 9.8 10.3 23.3 48.4 58.5

Growth (% y-y) 200.7 78.4 nm nm (50.3) (53.6) 104.6 nm (84.9) 107.5 20.9

Chong

Kun

Dang

Pharmaceutical

Sales 201.9 205.7 204.7 219.7 209.7 222.5 223.4 212.6 832.0 868.2 928.0

Growth (% y-y) 37.1 46.9 36.7 41.3 3.8 8.2 9.2 (3.2) 40.4 4.4 6.9


Growth (% y-y) (32.6) 30.4 88.7 91.2 103.0 57.7 6.1 (45.0) 43.4 11.2 13.4

Net profit* 5.6 7.3 14.9 13.2 11.4 11.2 18.1 5.6 40.9 46.4 53.2

Growth (% y-y) (9.0) nm 77.9 155.7 105.5 53.7 21.7 (57.6) nm 13.3 14.6

Donga ST

Sales 146.9 152.7 136.3 124.3 133.1 148.3 145.6 151.5 560.3 578.6 616.6

Growth (% y-y) 5.3 9.6 (8.5) (11.2) (9.4) (2.9) 6.8 21.9 (1.3) 3.3 6.6

Operating profit 11.7 8.2 1.7 (6.4) 4.9 7.3 7.6 9.9 15.2 29.7 47.0

Growth (% y-y) (8.5) (47.4) (89.3) nm (58.2) (10.7) 353.1 nm (72.1) 95.6 58.2

Net profit* 4.5 (3.8) 5.0 7.2 (11.3) 10.2 10.4 10.6 12.9 19.9 33.9

Growth (% y-y) (48.6) nm (53.8) (55.6) nm nm 108.7 45.8 (73.1) 54.2 70.4

SK

Chemicals

Sales 245.5 291.8 307.4 301.9 269.6 318.8 328.5 330.1 1,146.6 1,247.0 1,356.4

Growth (% y-y) 0.5 23.2 0.4 19.6 9.8 9.3 6.9 9.3 10.3 8.8 8.8


Growth (% y-y) nm nm 1.8 (12.3) 37.5 14.1 2.5 232.0 155.9 24.3 12.4

Net profit* 13.5 3.1 15.4 (20.4) 46.2 3.0 6.5 2.2 11.7 57.9 16.3

Growth (% y-y) 134.5 (95.7) 54.3 nm 240.8 (3.2) (57.7) nm (90.3) 395.7 (71.8)

Total

Sales 1,373.0 1,521.1 1,557.5 1,488.7 1,472.6 1,607.8 1,673.5 1,638.4 5,940.3 6,392.3 6,814.6

Growth (% y-y) 14.2 16.9 5.2 (13.0) 7.3 5.7 7.4 10.1 4.3 7.6 6.6


Growth (% y-y) 57.7 12.3 (26.8) (82.1) 39.2 18.8 18.8 106.8 (35.3) 34.0 13.6

Net profit* 118.2 76.9 86.5 31.5 99.3 90.0 126.3 74.4 313.1 390.0 398.4

Growth (% y-y) 68.1 (40.8) (17.3) (86.4) (16.0) 17.0 46.0 136.4 (41.7) 24.6 2.1

Note: Using parent financials for Donga ST and SK Chemicals

* Attributable to controlling shareholders


Healthcare

2017. 6. 15

93



SMEs

Boryung

Pharmaceutical

Sales 88.9 105.3 117.3 97.7 99.9 118.9 132.3 114.6 409.1 465.7 524.8

Growth (% y-y) 2.3 4.5 4.7 (3.9) 12.4 13.0 12.8 17.4 1.9 13.8 12.7


Growth (% y-y) (27.4) 42.9 11.4 (86.8) 12.7 11.2 16.3 534.8 (20.1) 40.4 51.2

Net profit* 3.2 8.7 3.2 (9.5) 2.7 9.6 67.5 6.4 5.6 86.2 37.6

Growth (% y-y) (40.4) 62.7 (40.9) nm (16.8) 10.9 1,978.1 nm (72.3) 1,435.0 (56.3)

Ilyang

Pharmaceutical

Sales 58.4 61.6 80.7 61.0 59.9 69.6 94.4 72.9 261.6 296.9 365.4

Growth (% y-y) 10.2 1.3 18.4 6.3 2.6 13.0 17.1 19.6 40.4 13.5 23.1


Growth (% y-y) 96.8 (29.9) 105.8 (7.9) (19.5) 15.0 72.1 38.9 49.4 23.5 49.0

Net profit* 2.4 1.5 1.1 0.8 1.6 2.4 4.4 4.6 5.9 13.0 23.3

Growth (% y-y) 206.1 (37.1) nm (75.2) (32.1) 55.4 291.7 446.7 63.2 120.5 78.9

Daewon

Pharmaceutical

Sales 58.1 61.7 55.2 65.7 62.9 69.0 64.6 75.6 240.7 272.0 311.1

Growth (% y-y) 11.7 13.7 10.7 9.5 8.2 11.9 16.9 15.0 11.3 13.0 14.4


Growth (% y-y) (5.0) 12.5 87.9 23.1 (5.7) 20.6 23.5 28.6 26.3 19.2 27.5

Net profit* 3.9 4.3 7.2 4.8 3.3 6.8 8.3 9.0 20.2 27.3 35.0

Growth (% y-y) 2.5 (19.2) 126.6 (10.2) (16.5) 56.7 14.8 87.4 14.4 34.9 28.1

ST Pharm

Sales 30.9 69.8 54.0 45.7 47.8 59.0 51.5 48.9 200.4 207.2 216.4

Growth (% y-y) 73.0 129.8 18.0 3.7 54.8 (15.4) (4.6) 7.0 45.1 3.4 4.4


Growth (% y-y) 613.6 548.5 22.1 48.4 105.6 (25.2) (9.5) (0.6) 125.1 (1.0) 1.6

Net profit* 13.4 23.7 16.3 11.7 13.4 18.5 15.0 13.3 65.2 60.3 62.3

Growth (% y-y) 1,769.6 622.0 34.3 25.9 (0.0) (22.2) (7.8) 13.6 158.9 (7.6) 3.3

Total

Sales 236.2 298.3 307.2 270.1 270.5 316.5 342.8 312.1 1,111.8 1,241.8 1,417.7

Growth (% y-y) 12.6 21.2 11.4 2.6 14.5 6.1 11.6 15.5 18.0 11.7 14.2


Growth (% y-y) 56.4 118.1 36.9 (2.9) 31.4 (8.9) 11.7 33.4 51.0 12.6 23.8

Net profit* 23.0 38.3 27.9 7.9 21.0 37.2 95.1 33.4 97.0 186.8 158.2

Growth (% y-y) 114.9 133.4 49.9 (64.5) (8.5) (2.7) 241.5 324.0 45.2 92.6 (15.3)

Biotech

Samsung

Biologics

Sales 88.8 47.6 52.8 105.5 107.6 78.1 117.7 137.2 294.6 440.6 539.5

Growth (% y-y) n/a n/a n/a n/a 21.3 64.2 122.8 30.0 222.8 49.5 22.5

Operating profit (13.7) (3.3) (12.8) (0.7) 3.4 (11.4) 8.2 17.5 (30.4) 17.8 40.1

Growth (% y-y) n/a n/a n/a n/a nm nm nm nm nm nm 125.1

Net profit* (25.7) (50.0) (44.1) (57.0) (33.1) (13.8) (11.5) (4.6) (176.8) (63.0) 22.1

Growth (% y-y) n/a n/a n/a n/a nm nm nm nm nm nm nm

Celltrion

Sales 90.9 159.9 146.5 180.2 175.8 208.6 205.7 302.0 577.6 892.1 1,185.7

Growth (% y-y) 11.2 7.4 (2.0) 21.3 93.4 30.4 40.4 67.5 9.2 54.5 32.9


Growth (% y-y) (36.0) (5.7) 0.1 27.8 256.5 35.4 54.8 117.9 (0.6) 89.3 40.0

Net profit* 7.9 90.6 59.2 63.7 68.2 83.5 91.8 146.1 221.4 389.7 561.4

Growth (% y-y) (69.1) 71.7 29.6 (18.5) 768.7 (7.9) 55.1 129.3 9.6 76.0 44.1

Total

Sales 179.7 207.5 199.3 285.7 283.5 286.7 323.3 439.2 872.2 1,332.7 1,725.2

Growth (% y-y) 119.8 39.3 33.3 92.3 57.8 38.2 62.2 53.7 40.7 52.8 29.5


Growth (% y-y) (70.4) (9.8) (17.6) 26.7 697.9 25.8 101.9 142.0 340.2 123.2 43.0

Net profit* (17.8) 40.6 15.1 6.7 35.2 69.7 80.3 141.5 44.6 326.7 583.6

Growth (% y-y) nm (23.1) (66.9) (91.4) nm 71.7 431.3 2,002.1 (97.9) 632.6 78.6

Note: Using parent financials for Celltrion; * Attributable to controlling shareholders


Healthcare

2017. 6. 15

94



Medical

devices

Osstem

Implant

Sales 77.8 76.4 87.5 102.9 93.5 101.6 102.0 112.2 344.6 409.3 468.1

Growth (% y-y) 27.8 9.3 23.4 35.3 20.2 32.9 16.5 9.1 24.1 18.8 14.4


Growth (% y-y) 34.3 (27.5) 42.3 (35.1) (27.8) 106.7 (0.8) 117.7 2.8 28.7 31.3

Net profit* 8.2 3.7 2.9 8.7 0.0 9.1 9.6 10.0 23.5 28.7 39.9

Growth (% y-y) 37.8 (50.3) (52.8) nm (99.7) 142.2 230.6 15.6 30.9 22.1 38.9

Dio

Sales 21.1 23.8 24.1 19.3 20.9 24.6 27.7 30.8 88.4 104.0 126.3

Growth (% y-y) 39.7 40.3 31.9 (16.4) (1.2) 3.3 14.7 59.8 20.3 17.7 21.4


Growth (% y-y) 114.1 87.8 70.8 (75.9) (8.2) (13.2) (1.5) 284.8 18.2 17.8 14.1

Net profit* 3.2 6.9 4.8 4.9 2.2 5.6 6.6 6.3 19.8 20.7 26.0

Growth (% y-y) 226.1 313.5 21.6 10.7 (30.8) (18.8) 38.1 28.3 79.4 4.8 25.3

Dentium

Sales 25.8 30.6 31.2 32.5 32.0 37.6 37.9 41.0 120.0 148.5 177.5

Growth (% y-y) 17.6 29.0 28.2 27.3 23.8 22.9 21.6 26.4 25.7 23.7 19.6


Growth (% y-y) 38.3 (5.5) 556.4 40.4 4.5 43.9 (5.7) 143.8 70.1 27.2 21.2

Net profit* 5.5 4.6 7.1 2.7 3.7 6.5 7.0 8.6 19.8 25.8 32.1

Growth (% y-y) 9.2 (14.7) 228.9 37.7 (31.6) 41.1 (0.8) 219.7 36.7 30.3 24.5

Vieworks

Sales 23.9 23.6 32.2 37.7 32.2 31.3 39.6 45.5 117.3 148.5 164.3

Growth (% y-y) 31.9 3.0 40.8 27.3 34.6 32.6 23.1 20.8 25.5 26.6 10.6


Growth (% y-y) 106.7 60.3 32.8 83.3 58.4 25.3 48.4 13.9 65.8 31.9 10.3

Net profit* 4.0 5.3 4.8 12.9 3.1 5.6 10.3 12.5 27.0 31.5 36.6

Growth (% y-y) 79.1 58.7 (25.4) 227.6 (21.4) 4.9 116.8 (3.2) 69.7 16.8 16.2

Value Added

Technology

Sales 51.8 64.5 53.8 68.2 44.2 56.3 46.8 60.2 238.3 207.6 238.9

Growth (% y-y) 10.7 14.2 7.3 6.7 (14.7) (12.7) (13.0) (11.7) 9.7 (12.9) 15.1


Growth (% y-y) 10.8 28.6 22.8 (13.6) (0.3) (18.9) (34.7) 1.3 10.6 (13.9) 10.2

Net profit* 4.2 8.9 3.0 8.6 59.4 11.4 7.9 10.6 24.8 89.2 34.3

Growth (% y-y) 158.3 2.7 (31.2) 31.0 1,308.9 27.9 158.1 22.8 16.3 260.1 (61.5)

Rayence

Sales 22.3 24.5 23.8 27.9 24.6 27.1 27.5 33.2 98.5 112.4 124.9

Growth (% y-y) 10.3 18.3 6.8 19.1 10.5 10.6 15.6 18.9 13.7 14.1 11.1


Growth (% y-y) 4.3 2.4 (14.0) (24.7) (0.2) (0.1) (5.4) 81.1 (9.0) 15.6 10.6

Net profit* 3.0 3.4 3.6 4.8 2.8 5.2 4.0 5.7 14.7 17.8 20.7

Growth (% y-y) 1.1 16.1 (20.3) 16.3 (4.9) 54.3 12.5 19.3 1.8 20.8 16.5

Total

Sales 222.8 243.4 252.6 288.3 247.4 278.4 281.5 322.9 1,007.1 1,130.2 1,299.9

Growth (% y-y) 21.6 15.5 21.0 19.4 11.1 14.4 11.4 12.0 19.3 12.2 15.0


Growth (% y-y) 39.2 18.5 54.2 (14.8) (1.0) 12.6 (1.4) 60.2 20.7 15.6 17.1

Net profit* 28.1 32.8 26.2 42.6 71.3 43.3 45.4 53.7 129.6 213.7 189.6

Growth (% y-y) 49.7 11.2 (5.1) 120.0 154.3 32.0 73.8 26.1 36.2 65.0 (11.3)

Note: * Attributable to controlling shareholders


Healthcare

2017. 6. 15

95



Medical

aesthetics

Medytox

Sales 28.8 31.5 33.0 40.0 40.5 44.5 45.7 53.0 133.3 183.7 231.6

Growth (% y-y) 53.0 44.1 43.3 61.1 40.7 41.3 38.5 32.5 50.6 37.8 26.1


Growth (% y-y) 47.9 34.1 42.6 57.6 28.9 27.8 40.2 35.6 45.5 33.3 27.1

Net profit* 13.6 15.9 14.6 15.1 17.0 18.7 19.5 24.4 59.2 79.7 101.0

Growth (% y-y) 59.4 35.4 39.3 31.1 24.5 17.6 33.8 62.0 40.0 34.5 26.7

Hugel

Sales 22.7 30.9 32.8 37.8 44.3 48.6 46.3 50.4 124.2 189.7 247.9

Growth (% y-y) 197.2 84.1 80.7 68.0 95.3 57.3 41.3 33.4 90.9 52.7 30.7


Growth (% y-y) 8,517.8 252.7 317.1 131.5 194.0 74.7 47.0 43.1 256.2 73.3 35.1

Net profit* 5.5 11.6 12.6 13.6 18.3 19.9 18.3 19.7 43.3 76.2 104.1

Growth (% y-y) 2,299.5 nm (74.4) 98.5 232.4 71.2 45.4 45.3 27.5 76.2 36.6

Total

Sales 51.4 62.4 65.8 77.8 84.7 93.2 92.1 103.4 257.4 373.3 479.4

Growth (% y-y) 94.6 61.5 59.8 64.4 64.8 49.2 39.9 32.9 67.6 45.0 28.4


Growth (% y-y) 124.9 88.4 112.8 86.0 86.4 49.6 43.6 39.2 99.4 51.6 31.3

Net profit* 19.1 27.6 27.2 28.6 35.3 38.6 37.8 44.1 102.5 155.9 205.1

Growth (% y-y) 118.1 nm (54.4) 56.2 84.5 40.2 39.2 54.1 34.5 52.1 31.5

Diagnostics

Seegene

Sales 17.2 18.5 17.8 20.2 21.0 22.5 21.5 25.5 73.7 90.5 106.5

Growth (% y-y) 4.7 12.6 16.7 18.7 21.9 21.5 20.9 26.5 13.1 22.8 17.6


Growth (% y-y) (35.5) 42.0 112.0 7.3 71.6 51.4 36.2 90.0 16.8 60.5 45.4

Net profit* 1.2 2.0 (0.5) 4.4 (0.3) 5.0 2.9 3.3 7.1 10.9 16.7

Growth (% y-y) (28.4) 3.9 nm 5,837.2 nm 146.0 nm (23.8) 5.1 53.5 52.5

i-Sens

Sales 26.2 31.0 32.2 34.5 32.1 37.5 37.5 41.0 124.1 148.1 167.4

Growth (% y-y) 19.2 16.3 31.4 24.3 22.2 20.8 16.3 18.7 22.8 19.4 13.0


Growth (% y-y) 29.9 28.9 21.2 (7.2) 15.1 3.6 7.1 16.4 16.0 10.2 22.6

Net profit* 4.6 4.4 5.9 5.5 4.1 5.8 5.6 5.7 20.4 21.2 26.7

Growth (% y-y) 43.4 (9.8) 77.1 4.8 (12.4) 31.9 (4.2) 3.9 22.5 3.9 26.2

Boditech

Med

Sales 10.1 15.7 14.9 14.2 13.3 18.7 18.2 17.0 55.0 67.2 84.0

Growth (% y-y) 26.1 48.6 34.8 40.0 32.0 19.0 21.8 19.6 38.1 22.3 24.9


Growth (% y-y) 38.7 25.6 0.1 (50.0) 3.1 17.4 23.4 158.1 0.1 34.3 61.9

Net profit* 3.1 3.7 3.5 2.3 2.1 5.3 5.3 3.6 12.6 16.3 26.6

Growth (% y-y) 78.6 29.5 nm nm (33.3) 43.8 51.3 56.9 nm 29.1 63.1

Total

Sales 53.6 65.3 65.0 68.9 66.4 78.7 77.2 83.5 252.7 305.8 357.8

Growth (% y-y) 15.2 21.5 27.7 25.5 24.0 20.5 18.8 21.2 22.7 21.0 17.0


Growth (% y-y) 10.4 30.2 24.7 (15.2) 22.8 16.9 17.8 54.4 11.7 26.5 39.0

Net profit* 9.0 10.1 8.9 12.1 5.8 16.1 13.8 12.6 40.1 48.4 69.9

Growth (% y-y) 34.3 4.6 231.4 408.2 (35.2) 59.3 55.9 3.9 87.2 20.6 44.6

Note: Using parent financials for i-Sens; * Attributable to controlling shareholders


Healthcare

2017. 6. 15

96

Big-pharmaceutical and biotech/diagnostics segments

Earnings solid in 1Q and to pick up momentum in 2H

1Q review: The large pharmaceutical firms under our coverage posted 1Q sales of KRW1.5t (up 7.2%

y-y), operating profit of KRW113.5b (up 39.3% y-y), and net profit of KRW107.5b (down 12.1% y-y),

beating consensus by 3.2%, 61.9%, and 38.6%, respectively. Top-line growth was driven by strength

in: 1) Yuhan’s API exports; 2) Hanmi’s domestic supergenerics sales; 3) Green Cross’s blood

derivatives exports; and 4) CKD’s domestic sales of licensed-in drugs. Profits beat forecasts handily

as SG&A costs stabilized thanks to Korea’s new anti-corruption law.

Meanwhile, our covered biotech/diagnostics firms posted 1Q sales of KRW353.8b (up 50.1% y-y) and

operating profit of KRW105.5b (up 385.2% y-y), beating consensus by 7.3% and 35.8%, respectively.

They swung y-y to a combined net profit of KRW38.9b, which missed consensus by 41.5%. Top-line

growth was led by strong exports of: 1) Celltrion’s and Samsung Bioepis’ biosimilars; 2) Samsung

Biologics’ bio-CMO products; 3) Seegene’s molecular diagnostic assays; and 4) i-Sens’s blood glucose

test strips. Profitability beat forecasts easily thanks to operating leverage.

Large pharmaceuticals, biotech, and diagnostic coverage: 1Q17 results

(KRWb) 1Q17 (actual) 1Q17 (consensus) Diff (%)

Sales Operating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%pts)

Green Cross 275.4 13.7 7.0 5.0 264.2 9.7 5.2 3.7 4.2 40.5 34.0 1.3

Yuhan 351.2 35.5 29.5 10.1 312.3 24.3 35.6 7.8 12.5 45.9 (17.0) 2.3

Hanmi

Pharmaceutical 233.5 31.4 24.6 13.4 233.7 11.4 8.8 4.9 (0.0) 175.1 178.8 8.6

Chong Kun Dang

Pharmaceutical 209.7 16.8 11.4 8.0 213.6 11.4 7.9 5.3 (1.8) 47.1 44.9 2.7

Donga ST 133.1 4.9 (11.3) 3.7 136.6 4.1 (5.4) 3.0 (2.6) 21.7 nm 0.7

SK Chemicals 269.6 11.2 46.2 4.2 266.5 9.1 25.4 3.4 1.2 22.7 81.8 0.7

Large pharmas 1,472.5 113.5 107.5 7.7 1,426.9 70.1 77.6 4.9 3.2 61.9 38.6 2.8

Samsung Biologics 107.6 3.4 (33.1) 3.2 101.8 (9.6) n/a (9.4) 5.7 nm nm 12.6

Celltrion 175.8 90.8 68.2 51.6 158.5 74.4 58.7 46.9 10.9 22.0 16.2 4.7

Seegene 21.0 3.3 (0.3) 15.9 20.5 3.3 0.9 16.2 2.3 (0.0) nm (0.4)

i-Sens 36.0 5.3 2.0 14.8 35.4 6.5 4.5 18.3 1.5 (17.8) (55.5) (3.5)

Boditech Med 13.3 2.6 2.0 19.7 13.5 3.1 2.4 22.7 (0.9) (13.8) (13.7) (3.0)

Biotech/Diagnostics 353.8 105.5 38.9 29.8 329.7 77.7 66.4 23.6 7.3 35.8 (41.5) 6.3

Note: Using parent financials for Donga ST, SK Chemicals, and Celltrion

Source: WiseFn, Samsung Securities

Healthcare

2017. 6. 15

97

2017 consensus rises to reflect solid 1Q results: At the start of the year, consensus put the

combined sales of the large pharmaceuticals firms we cover at KRW6.4t, operating profit at

KRW399.9b, and net profit at KRW388.8b. But as of May 26, these figures had changed to KRW6.4t

(up 0.2%), KRW435b (up 8.8%), and KRW388b (down 0.2%), respectively. Consensus at the start of

the year had the combined sales of our covered biotech/diagnostics firms at KRW15t, operating profit

at KRW486.1b, and net profit at KRW383.8b. As of May 26, they figures stood at KRW1.6t (up 5.6%),

KRW530.3b (up 9.1%), and KRW372.2b (down 3%).

Large pharmaceuticals, biotech, and diagnostic coverage: 2017 consensus before and after release of 1Q17 results

(KRWb) Company Sales Operating profit Net profit

Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%) Feb 28 May 26 Chg (%)

Large

pharmas

Hanmi Pharmaceutical 919.2 923.0 0.4 38.6 73.1 89.3 51.0 56.3 10.5

Yuhan 1,444.5 1,478.3 2.3 111.4 119.2 7.0 155.1 146.7 (5.4)

Green Cross 1,268.9 1,286.5 1.4 83.5 81.9 (2.0) 63.9 62.7 (1.9)

Chong Kun Dang

Pharmaceutical 882.4 877.0 (0.6) 66.4 68.9 3.8 45.7 47.6 4.2

Donga ST 588.7 561.4 (4.6) 31.1 26.2 (15.9) 20.6 10.3 (50.3)

SK Chemicals 1,262.4 1,252.7 (0.8) 68.8 65.7 (4.6) 52.4 64.4 22.9

Total 6,366.0 6,378.9 0.2 399.9 435.0 8.8 388.8 388.0 (0.2)

Biotech/

Diagnostics

Samsung Biologics 406.5 440.0 8.2 3.0 13.1 336.7 (30.1) (51.5) nm

Celltrion 823.8 871.0 5.7 418.8 454.9 8.6 363.2 378.1 4.1

Seegene 85.0 89.0 4.7 14.7 16.0 8.6 10.9 9.7 (11.2)

i-Sens 157.1 160.4 2.1 30.6 29.0 (5.4) 22.3 19.9 (10.4)

Boditech Med 70.7 68.5 (3.1) 19.0 17.4 (8.5) 17.5 16.0 (9.0)

Total 1,543.0 1,628.9 5.6 486.1 530.3 9.1 383.8 372.2 (3.0)

Note: Using parent financials for Donga ST, SK Chemicals, and Celltrion


2Q-4Q earnings outlook bright for Yuhan and Hanmi… In 2Q, Hanmi’s and CKD’s

earnings growth should benefit from a low base, while Donga ST’s will suffer from a high base. In 2H,

Hanmi and Donga ST should experience favorable base effect, whereas CKD will face a high base.

Yuhan should do well in each of the next three quarters regardless of base effect, though its 3Q results

will benefit from a low base. Despite a low base, earnings at Green Cross should come in flat y-y in

each of the next three quarters due to increased R&D investment.

…………and Celltrion, Seegene, and i-Sens: Typically, 2Q is a seasonally weak quarter for Samsung

Biologics, which conducts plant maintenance at the turn of the year and recognizes sales 90 days

after production. From 3Q, however, sales should hit new heights and profits improve. Celltrion,

Seegene, and i-SENS should perform consistently well in the year’s remaining quarters. Their

quarterly profits are likely to hit all-time highs in 2H, leading to record full-year earnings this year.

Operating profit at Boditech Med should stay flat y-y in each this year’s remaining quarters, due to

increased R&D investment and costs associated with product approvals.

Healthcare

2017. 6. 15

98

Hanmi our top pick among large pharmas, Samsung Biologics among biotech firms

Hanmi top pick among large pharmas; Yuhan second pick: Hanmi is our top pick among

large pharmaceutical firms, and Yuhan is our next favorite. Hanmi will soon start producing samples

of its Lapscovery-based biologics for clinical trials. We believe it is time to focus on the possibilities of

Efpeglenatide and HM12525A/JNJ-64565111 resuming global clinical trials and generating

milestone income. Also, we foresee strong quarterly results over 2Q-4Q on a low base. Yuhan should

also post decent results over 2Q-4Q, backed by strong domestic sales of licensed-in prescription

drugs and robust API exports. In particular, 3Q results should benefit from a low base due to a 3Q16

earnings shock. Subsidiary Yuhan Kimberly has struggled because: 1) its China-bound exports have

been hit by fallout from the THAAD conflict; and 2) domestic sales of wipes contracted after

authorities told it to stop selling wet types. But the firm should bounce back over 2Q-4Q.

Samsung Biologics top biotech pick; Seegene second pick: Samsung Biologics is our top

biotech pick and Seegene our next favorite. With construction of a Samsung Biologics’ third plant due

to conclude in 2H, the firm is likely to pursue even more CMO contracts with multinationals.

Subsidiary Samsung Bioepis expects to receive US FDA approval for its Lantus biosimilar Lusduna,

and EMA approvals of its Humira and Herceptin biosimilars in 2H. As 2Q is a seasonally weak

quarter for the firm due to plant maintenance at the turn of the year, Samsung Biologics should post

record sales and growing profits from 3Q. Seegene’s quarterly growth has accelerated since it

launched new Allplex products in 2016. Quarterly results are set to hit all-time highs in 2H, lifting

annual earnings to record levels, too. In addition, the firm should commence ODM shipments to

Beckman Coulter in 4Q, after completing related development and the approval process in 3Q. The

contract will generate estimated sales of KRW5b during the first year of supply, and annual sales are

projected to reach KRW30b-50b thereafter.

Healthcare

2017. 6. 15

99

SMEs

Earnings weak in 1Q due to rise in costs, but some firms to see momentum gather pace

1Q review: The combined 1Q sales, operating profit, and net profit of the nine pharmaceutical

SMEs we cover came in at KRW630.1b, KRW72.5b, and KRW56.4b, respectively, missing consensus

by 2.2%, 9.8%, and 12.8%. Excluding API manufacturer ST Pharm, combined figures for the other

eight missed consensus by 2.4%, 14.6%, and 17.2%, respectively. The group’s overall profitability

benefited from robust growth in ST Pharm’s high-margin oligonucleotide CMO sales and Ilyang

Pharm’s in-house-developed new drugs and export growth. Meanwhile, the operating profit miss in

1Q is mainly attributable to higher COGS ratio at Boryung Pharm (due to an increasing number of

drugs subject to co-promotion) and SG&A cost increases at Daewon Pharmaceutical (due to

increases in OTC advertising and commissions paid). Among firms we do not cover, Ildong Pharm’s

operating profit was hurt by inventory depletion at pharmacies following its opening of an online

drugstore; Dongkuk Pharm saw higher sales commissions in its beauty/healthcare business; and

Korea United Pharm incurred higher labor costs after increasing its headcount. Samjin Pharm and

Huons reported in-line 1Q results.

SMEs: 1Q17 results


Sales Operating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%pts)

Boryung Pharm* 99.9 4.9 2.7 4.9 99.0 5.5 5.0 5.6 0.8 (11.7) (47.0) (0.7)

Daewon Pharm* 62.9 4.8 3.2 7.6 65.0 6.8 5.3 10.4 (3.3) (29.3) (39.9) (2.8)

Ilyang Pharm* 59.9 5.9 3.4 9.9 62.9 5.6 3.7 8.9 (4.8) 6.0 (7.4) 1.0

ST Pharm* 47.8 17.8 13.4 37.2 47.2 16.4 12.8 34.7 1.3 8.6 4.8 2.5

Ildong Pharm 106.7 3.1 2.4 2.9 115.8 7.2 6.4 6.2 (7.9) (57.2) (62.0) (3.3)

Dongkuk Pharm 80.6 11.2 8.2 13.9 79.6 12.4 10.2 15.5 1.3 (9.6) (19.7) (1.7)

Samjin Pharm 60.1 11.2 8.6 18.6 62.1 11.5 8.9 18.5 (3.2) (2.7) (3.6) 0.1

United Pharm 47.1 6.6 4.9 14.0 48.2 7.9 6.4 16.5 (2.2) (16.8) (23.0) (2.5)

Huons 65.2 7.1 9.6 11.0 64.2 7.2 5.9 11.2 1.6 (1.0) 60.9 (0.3)

Total 630.1 72.5 56.4 11.5 644.0 80.4 64.7 12.5 (2.2) (9.8) (12.8) (1.0)

Ex. ST Pharm 582.3 54.7 43.0 9.4 596.8 64.0 51.9 10.7 (2.4) (14.6) (17.2) (1.3)

Note: * Under our coverage


Healthcare

2017. 6. 15

100

Consensus for 2017 operating tumbles: Early this year, consensus had our covered SMEs

posting 2017 sales, operating profit, and net profit of KRW1.29t, KRW187.1b, and KRW171.7b,

respectively. However, as of May 31, these forecasts were down 3.4%, 4.9%, and 0.4%, respectively, to

KRW1.25t, KRW178b, and KRW171.1b.

SME coverage: 2017 consensus before and after release of 1Q17 results



SMEs

Boryung Pharm 476.3 465.9 (2.2) 36.4 32.9 (9.5) 58.0 66.2 14.2

Ilyang Pharm 303.3 286.8 (5.4) 30.1 26.3 (12.6) 21.0 13.7 (34.8)

Daewon Pharm 278.4 273.5 (1.7) 35.8 35.6 (0.4) 27.3 26.6 (2.6)

ST Pharm 232.7 220.8 (5.1) 84.9 83.1 (2.1) 65.5 64.6 (1.4)

Total 1,290.7 1,247.1 (3.4) 187.1 178.0 (4.9) 171.7 171.1 (0.4)


Daewon and Boryung to enjoy earnings momentum over 2Q-4Q: A high base will weigh

on 2Q growth at ST Pharm, Boryung, and Ilyang. Still, the latter two should benefit from a low base

in 2H, while ST Pharm should continue to face a high base. Daewon should post robust earnings

every quarter regardless of base effect.

Top picks

ST Pharm our top pick; Huons second pick: In choosing picks from among our covered

pharmaceutical SMEs, we focus more on those stocks with share-price momentum (and

undemanding valuations), rather than on earnings. ST Pharm (an export-oriented API maker) is our

top pick, and Huons our second choice—the latter because it is reinforcing its esthetic business. ST

Pharm has the highest exposure to exports (83.1% of 2016 sales) among domestic pharmaceuticals

firms, and thus is insulated from domestic regulatory risk. Although its 2017 earnings momentum

seems limited, we believe shares have fully priced in concerns over falling orders for the API for

hepatitis C treatments. In addition, oligonucleotide sales have been increasing quickly, and more

CMO contracts with multinational pharmaceuticals firms are expected in 2H. We believe ST Pharm

will enter an oligonucleotide-driven growth cycle in 2018. Meanwhile, Huons should see operating

profit decline y-y in 2017 as costs related to clinical trials increase, but its fundamentals should be

boosted by a stronger esthetic business. Moreover, it should begin global clinical trials and sign out-

licensing contracts in 2H for its BTX and a new eye drop for dry-eye syndrome.

Healthcare

2017. 6. 15

101

2H earnings outlook for medical-aesthetics and -device firms

Medical aesthetics firms meet high 1Q expectations; momentum to stay solid into 2H

1Q results solid: The combined sales, operating profit, and net profit at the nation’s top-four

medical-aesthetics firms’ rose 52.8%, 68.8%, and 55% y-y, respectively, to KRW107.7b, KRW54.6b,

and KRW42b in 1Q, beating consensus by 13.1%, 15.5%, and 12.9%. BTX exports grew explosively,

while filler exports also increased at a solid pace—despite concerns over China tightening regulations

on Korean filler imports (in retaliation for Korea’s decision to install the THAAD anti-missile system

on the peninsula). Hugel and Medytox’s 1Q sales rose q-q despite 4Q typically being the strongest

season and 1Q the weakest. Hugel’s results bettered forecasts in 1Q, backed by simultaneous growth

in BTX and filler sales, with overall sales, operating profit, and net profit attributable to controlling

interest beating consensus by 28.4%, 45.6%, and 48.9%, respectively. Medytox’s 1Q sales beat

consensus by 5.9%, but due to increased SG&A costs following the addition of staff and increased

R&D spending, operating profit and net profit attributable to controlling interest was in-line.

Medical device firms post weak 1Q results; earnings momentum to pick up in 2H

1Q results weak: The combined 1Q sales, operating profit, and net profit of medical-device firms

under our coverage rose 11.1%, dipped 1%, and jumped 149.1% y-y, respectively, the former two

missing consensus by 2.3% and 6.9%, and the latter beating it by 161.8%. Rayence was excluded from

Vatech’s consolidated accounting. Factoring the subsidiary back in, combined 1Q sales and operating

profit would have risen 18.5%, and 7.8% y-y, respectively. The six firms’ top-line growth was solid in

1Q, backed by robust implant exports (at Osstem Implant, Dio, and Dentium), healthy industrial-use

camera sales (at Vieworks; amid a capex expansion in the OLED industry), and growing 3D dental

imaging device exports (at Vatech). However, combined operating profit was weak due to mass

hiring of sales personnel and increased R&D costs at implant firms. Net profit missed consensus due

to forex-related losses amid won appreciation.

Medical-aesthetic and -device coverage: 1Q17 results


SalesOperating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%)

Sales Operating

profit

Net

profit

Operating

margin

(%pts)

Medytox* 40.5 21.2 17.0 52.3 38.2 21.5 16.5 56.1 5.9 (1.3) 3.0 (3.8)

Hugel* 44.3 25.8 20.9 58.4 34.5 17.7 14.1 51.5 28.4 45.6 48.9 6.9

Caregen** 10.3 4.8 1.8 46.2 10.2 4.8 4.0 47.1 1.1 (0.7) (54.5) (0.8)

Humedix 12.6 2.8 2.3 22.4 12.3 3.3 2.7 26.8 2.7 (14.2) (14.7) (4.4)

Medical aesthetics 107.7 54.6 42.0 50.7 95.2 47.3 37.2 49.7 13.1 15.5 12.9 1.0

Osstem Implant* 93.5 7.9 (0.3) 8.4 88.3 11.1 3.1 12.6 5.9 (28.9) (109.4) (4.1)

Dio* 20.9 6.5 3.2 31.0 21.7 5.5 4.0 25.4 (3.8) 17.1 (20.6) 5.5

Dentium* 32.0 8.5 3.8 26.7 31.5 8.0 5.0 25.4 1.6 6.6 (24.9) 1.3

Vieworks* 32.2 7.6 3.1 23.7 31.7 8.3 6.4 26.3 1.6 (8.3) (51.7) (2.6)

Vatech* 44.2 8.3 60.6 18.8 55.1 8.7 6.0 15.8 (19.6) (4.2) 919.2 3.0

Rayence* 24.6 4.3 2.8 17.4 25.1 4.7 3.5 18.7 (2.1) (9.1) (19.7) (1.3)

Medical devices 247.4 43.1 73.2 17.4 253.3 46.3 28.0 18.3 (2.3) (6.9) 161.8 (0.9)

Note: * Under our coverage, ** Parent-based


Healthcare

2017. 6. 15

102

Medical aesthetics—2017 consensus operating profit rises 8.5% from start of year: At

the start of the year, consensus had the combined sales, operating profit, and net profit of our two

covered medical aesthetics firms—ie, Hugel and Medytox—hitting KRW326.5b, KRW179.9b, and

KRE147.8b, respectively, in 2017. As of May 26, however, those forecasts had risen 8.4%, 8.5%, and

5%, respectively, to KRW354b, KRW195.2b, and KRW155.2b.

Medical devices—2017 consensus operating profit falls 10.9% from starts of year:

Early this year, consensus had the combined sales, operating profit, and net profit of our six covered

medical device firms hitting KRW1.15t, KRW232.3b, and KRW174.5b, respectively, in 2017. As of

May 26, however, forecasts for the first two figures had fallen 2.5% and 10.9%, respectively, to

KRW1.12t and KRW207b. Consensus for the latter figure was up 15.3% to KRW201.2b. Excluding

Vatech, which removed Rayence from consolidated accounting in 1Q, consensus sales would have

risen 3%, while consensus operating profit and net profit would have fallen 6.2% and 9.8%,

respectively.

Medical-aesthetic and -device coverage: 2017 consensus before and after release of 1Q17 results



Medical

aesthetics

Medytox 166.5 178.2 7.0 95.6 98.2 2.7 76.6 77.5 1.1

Hugel 160.0 175.8 9.9 84.3 97.1 15.1 71.1 77.7 9.2

Total 326.5 354.0 8.4 179.9 195.2 8.5 147.8 155.2 5.0

Medical

devices

Osstem Implant 377.6 399.9 5.9 53.5 42.2 (21.1) 35.0 23.7 (32.4)

Dio 102.4 104.7 2.3 30.6 29.6 (3.2) 24.2 22.5 (6.8)

Dentium* 145.6* 144.4 (0.8) 33.1 33.5 1.4 26.0 25.1 (3.1)

Vieworks 144.2 144.5 0.2 39.2 39.7 1.3 30.4 31.5 3.6

Vatech 266.5 211.4 (20.7) 53.7 39.6 (26.3) 40.3 80.1 98.9

Rayence 113.4 116.0 2.3 22.2 22.4 0.7 18.7 18.3 (2.3)

Total 1,149.7 1,120.9 (2.5) 232.3 207.0 (10.9) 174.5 201.2 15.3

Note: * Mar 31 figure, as Dentium listed on Mar 15


Hugel, Medytox to enjoy solid earnings momentum over 2Q-4Q: We expect Hugel’s

earnings momentum to remain solid over 2Q-4Q given growing global demand for BTX and filler

products and the firm’s price competitiveness. Hugel’s exports should grow well in 2H as it starts

shipping to large emerging markets. The firm began recognizing sales to Russia in 1Q and should

start to recognize sales in Brazil and Mexico in 2Q and 3Q, respectively. Concerns over China

tightening regulations on parallel imports from Korea turned out to be overblown in 1Q, which we

believe suggests Hugel’s filler exports will remain solid going forward. Earnings momentum should

strengthen in 2H as the firm capitalizes fully on largest shareholder Bain Capital’s extensive global

network and uses the capital injection from Bain to strengthen its distribution network in key export

markets (eg, by establishing local subsidiaries or acquiring local firms). Meanwhile, Medytox should

also see stronger earnings momentum in 2H as its BTX and filler exports grow well. That the firm

recently won domestic approval for products produced at its #3 plant should completely resolve its

BTX capacity shortage issue in 3Q17. Sales in key markets (eg, Korea, Thailand, Japan, Brazil, and

Iran) should grow evenly in 2H, but SG&A costs are likely to edge up due to the addition of

production and R&D staff.

Healthcare

2017. 6. 15

103

Dentium to enjoy earnings momentum over 2Q-4Q… Despite solid top-line growth,

operating margin at Dentium, Osstem Implant, and Dio is unlikely to improve visibly in 2H, as the

increases in sales personnel and R&D investments will bump up SG&A costs. While Dentium and

Osstem are likely to benefit from a low base in 2Q, Dio will face a high base in 2Q. All three firms will

face a high base in 3Q, but a low base in 4Q. Dentium’s earnings momentum should stand out most,

as its SG&A cost increases are likely to be the smallest.

…Vieworks and Vatech, too: Exports at medical-imaging firms Vieworks, Vatech, and Rayence

should remain solid in 2H. Though Vieworks’ is likely to report weak 2Q exports, it should beat

market estimates in 2H—despite a high base. Vatech will face a high base y-y over 2Q-4Q as it no

longer treats Rayence as a consolidated subsidiary, but its dental operation should keep posting solid

results, base effect notwithstanding. Rayence should benefit from a low base in 4Q, which is also

when its new operations should take off in earnest.

Hugel our preferred medical-aesthetics firm; Dentium our top medical-device firm

Hugel our top pick among medical-aesthetics firms: Hugel is our top pick among medical-

aesthetics firms. Backed by growth in sales of both BTX and fillers, operating profit should rise 73.4%

to KRW109.7b in 2017. The firm should use a capital injection of KRW454.7b from Bain Capital to: 1)

strengthen its distribution network in the US by securing a global pharma as a partner; 2) establish

local subsidiaries and acquire local distributors in key markets, which should help boost ASPs; and 3)

increase its stake in filler-making subsidiary Across, which should lead net margin (attributable to

controlling shareholders) to rise. Moreover, the firm has a solid longer-term growth story, as it plans

to enter the US, Europe, and China in 2019. Shares, trading at KRW451,000 (on May 26) were nearly

on par with the per-share acquisition price that Bain Capital paid to purchase a 45.3% stake in the

firm. Considering Bain’s expected return, we believe Hugel has a lot of upside.

Dentium our top pick among medical-device firms: Dentium was trading at 16.1x 2017 P/E

on May 26, discounted 37.4% to the 25.7x average of Korean rivals Osstem Implant (26x) and Dio

(25.4x). Excluding treasury shares (22.1% of shares outstanding), Dentium would have been trading

at just 12.5x P/E. We believe the steep discount is unwarranted considering its solid earnings growth

momentum. We forecast that Dentium’s full-year sales will rise 23.7% this year, backed by implant

market growth in Asia. As for the domestic implant market, contrary to concerns, it should keep

growing, backed by a likely expansion of insurance coverage, thus sustaining Dentium’s top-line

growth over the longer term. Unlike domestic rivals, the firm plans to keep tight control of SG&A

costs, suggesting earnings will remain solid in the near term.

Healthcare

2017. 6. 15

104

Healthcare coverage: Valuation summary

(KRW)

Target price

Current

price

Upside

Rating

EV/EBITDA

(x)

P/B

(x)

P/E

(x)

P/E

(consensus, x)

(%) 2017E 2017E 2017E 2018E 2017E 2018E

Green Cross 210,000 176,000 19.3 BUY 19.5 1.9 36.5 33.8 35.2 29.5

Yuhan 330,000 248,500 32.8 BUY 15.4 1.6 18.4 16.8 20.0 17.8

Hanmi Pharmaceutical 450,000 364,000 23.6 BUY 36.1 5.7 84.0 69.5 84.9 60.4

Chong Kun Dang

Pharmaceutical 140,000 120,500 16.2 BUY 12.9 2.9 24.4 21.3 23.8 21.9

Donga ST 110,000 98,000 12.2 BUY 15.5 1.4 41.6 24.4 81.4 30.6

Samsung Biologics 260,000 213,500 21.8 BUY 155.3 3.5 n/a 638.2 n/a 259.8

Celltrion 135,000 93,800 43.9 BUY 21.2 4.5 28.1 20.5 37.5 26.8

Seegene 45,000 40,000 12.5 BUY 46.5 6.8 96.0 62.9 108.7 62.5

i-Sens 38,000 28,150 35.0 BUY 11.3 2.2 18.3 14.5 18.9 15.1

Boditech Med 23,000 19,050 20.7 BUY 22.3 4.9 27.2 16.7 27.7 18.5

SK Chemicals 78,000 71,200 9.6 BUY 15.5 1.0 15.8 14.6 15.6 13.3

Boryung Pharmaceutical 64,000 50,300 27.2 BUY 8.7 1.5 5.2 11.8 6.7 13.7

Ilyang Pharmaceutical 50,000 40,600 23.2 BUY 24.0 3.6 53.4 34.0 100.2 86.0

Daewon Pharmaceutical 26,000 20,350 27.8 BUY 7.9 2.0 13.6 10.6 13.7 11.2

ST Pharm 56,000 48,400 15.7 BUY 8.3 2.5 15.0 14.5 14.0 13.2

Osstem Implant 65,000 52,200 24.5 BUY 15.5 5.5 26.0 18.7 28.6 21.8

Dio 41,000 34,700 18.2 BUY 15.2 4.0 25.4 20.3 24.1 19.1

Dentium 50,000 37,450 33.5 BUY 10.9 1.8 16.1 12.9 17.0 13.3

Vieworks 87,000 56,000 55.4 BUY 11.4 4.0 17.8 15.3 17.7 14.6

Vatech 36,000 28,700 25.4 BUY 7.8 1.8 4.8 12.4 5.7 12.9

Rayence 22,000 18,600 18.3 HOLD 8.3 1.6 17.3 14.9 16.7 13.7

Medytox 600,000 506,800 18.4 BUY 27.4 12.4 36.0 28.4 37.0 30.7

Hugel 570,000 451,900 26.1 BUY 8.7 2.8 23.9 19.7 21.9 17.5

Note: Based on May 26 close


2017. 6. 15

Hanmi Pharmaceutical (128940)

Pipeline value to shed discount

● Global clinical trials for efpeglenatide and HM12525A/JNJ-64565111 are likely to

resume in 2H. Successful clinical trials and related milestones, of course, are key

to shares in firms with out-licensed drugs. We present Hanmi Pharmaceutical as

our top pharmaceutical pick for its likely R&D progress and strong quarterly y-y

growth over into 2018 backed by the base effect.

WHAT’S THE STORY?

Efpeglenatide, HM12525A/JNJ-64565111 likely to resume clinical trials: Hanmi

Pharmaceutical is involved with numerous clinical trials: Rolontis (out-licensed to Spectrum) and

olmutinib (ZaiLab) in Phase III in the US and China, respectively; poziotinib (Spectrum) and

HM71224 (Eli Lilly) in Phase II in the US and globally, respectively; and HM95573 (Genentech) in

Phase I domestically. The company in 2H: 1) targets starting Phase III trials for efpeglenatide

(Sanofi) and Phase I trials for JNJ-64565111 (Johnson & Johnson); and 2) expects its 10 drug

candidates under pre-clinical trials to enter clinical ones, of which LAPS-GLP/GCG/GIP triple

agonist-based obesity treatment HM15211 and FLT3-inbibitor for acute myeloid leukemia are

particularly noteworthy. The firm is pursuing new out-licensing deals—including one for long-

acting growth hormone LAPS-hGH (efpegsomatropin—and should receive milestone income as

out-licensed drugs progress through trials.

Trial progress key to shares: We looked at cases of foreign firms that inked out-licensing

deals worth over USD1b in 2015. Galapagos, Lexicon Pharmaceuticals, Five Prime Therapeutics,

and Innate Pharma have no operating value but out-licensed innovative drug candidates to

multinational players. Both the size of the contract and progress through clinical trials—and

subsequent milestone payments—influenced shares, so the market may remove the discount on

Hanmi’s pipeline as candidate drugs enter the late stages of trials and generate milestone revenue.

Top pick for trial progress, strong growth figures: We advise focusing on prospects of

efpeglenatide and HM12525A/JNJ-64565111 resuming global clinical trials and bringing in

milestone income. Meanwhile, Hanmi should post strong quarterly y-y growth over 2Q-4Q thanks

to last year’s low base. We raise our target price to KRW450,000, and present the firm as our top

pharmaceutical pick.

(Continued on the next page)

Company Update

SUMMARY FINANCIAL DATA

2016 2017E 2018E 2019E

Revenue (KRWb) 883 915 951 977

Net profit (adj) (KRWb) 30 63 76 73

EPS (adj) (KRW) 2,089 4,335 5,239 5,068

EPS (adj) growth (% y-y) (84.9) 107.5 20.9 (3.3)

EBITDA margin (%) 7.4 12.6 13.5 12.5

ROE (%) 3.5 7.1 7.9 7.1

P/E (adj) (x) 174.2 84.0 69.5 71.8

P/B (x) 6.1 5.7 5.3 4.9

EV/EBITDA (x) 63.1 36.1 31.7 32.7

Dividend yield (%) 0.0 0.0 0.0 0.0

Source: Company data, Samsung Securities estimates

Brian Lee

Analyst

[email protected] 822 2020 7177

Wonyong Park

Research Associate

[email protected]

822 2020 7847

AT A GLANCE

Target price KRW450,000 (23.6%)

Current price KRW364,000

Market cap KRW4.1t/USD3.7b

Shares (float) 11,163,452 (58.2%)

52-week high/low KRW670,486/KRW266,043

Avg daily trading value (60-day)

KRW30.6b/ USD27.3m

ONE-YEAR PERFORMANCE

1M 6M 12M

Hanmi Pharmaceutical (%) 21.1 7.7 -36.6

Vs Kospi (%pts) 13.5 -9.7 -47.3

KEY CHANGES

(KRW) New Old Diff

Recommend. BUY BUY

Target price 450,000 410,000 9.8%

2017E EPS 4,335 4,301 0.8%

2018E EPS 5,239 4,565 14.8%

SAMSUNG vs THE STREET

No of estimates 14

Target price 404,308

Recommendation 3.5

BUY★★★: 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL★★★: 1

* Share price and financials based on

May 26

Hanmi

Pharmaceutical

2017. 6. 15

106

Foreign firms with big out-licensing deals in 2015: Galapagos (Belgium) and Gilead

Sciences in Dec 2015 inked a deal to develop and commercialize JAK 1-selective inhibitor filgotinib

for arthritis (under Phase II trials), with the latter paying the former USD2.075b (USD725m upfront,

USD1.35b in milestones, royalties of at least 20%). Lexicon Pharmaceuticals (US) in Nov 2015 out-

licensed diabetes candidate sotagliflozin (Phase III) to Sanofi for USD1.7b (USD300m upfront,

USD1.4b in milestones, royalties of at least 10%). The drug works as a dual inhibitor of SGLT-1 and

SGLT-2. In Oct 2015, Five Prime Therapeutics (US) out-licensed CSF1R inhibitor cabiralizumab

(Phase I) to BMS for USD1.75b (USD350m upfront, USD1.4b in milestones, royalties of 15-25%). In

Apr 2015, Innate Pharma (France) out-licensed NKG2A inhibitor monalizumab (Phase II) to

AstraZeneca for USD1.275b (USD250m upfront, USD1.025b in milestones, royalties of 10%).

Trial progress key to shares: Based on 30-day average share prices before and after the out-

licensing deals, the combined market cap of the four firms leapt USD314m, equal to 77.3% of their

USD460m in upfront payments. Performances have since diverged. For recent 30-day average share

prices (relative to 30-day averages right after the deals), Galapagos is up 91.5%, Lexicon 16.7%, Five

Prime 4.2%, while Innate has shed 25.2%. Progress through clinical trials was the difference maker.

Galapagos in May 2016 said it would start global Phase III trials by end-year for indications of

Crohn’s disease and ulcerative colitis. It dosed the first patient for Crohn’s disease in Nov 2016 and

for ulcerative colitis in Dec 2016, triggering respective milestone payments of USD50m and USD10m.

Lexicon in Mar 2016 announced plans to start global Phase III trials for type-2 diabetes within the

year, and in Sep 2016 reported successful results for global Phase III trials for type-1 diabetes. In

contrast, Five Prime in Oct 2016 initiated the Phase Ib portion of a clinical trial evaluating its drug

candidate in combination with BMS’s Opdivo. Innate entered Phase I/II trials of its drug candidate in

combination with Imbruvica (ibrutinib) in Oct 2015, Phase Ib/II trials in combination with Erbitux

(cetuximab) in Dec 2015, and Phase I trials in combination with Imfinzi (durvalumab) in Feb 2016.

Share price performances, of course, are impacted by both the size of out-licensing contracts and also

the ability of out-licensed drug candidates to progress through trials and trigger milestone payments.

Hanmi’s pipeline value to rise as drugs make progress, trigger milestones: Galapagos,

Lexicon, Five Prime, and Innate have no operating value but successfully out-licensed innovative

drug candidates to multinational players. Lacking operating value, their market caps can be seen as

the equivalent of the value of their drug pipeline. Based on recent 30-day market caps, we estimate

market caps of the four firms at USD4b, USD1.62b, USD897m, and USD615m, respectively. Hanmi

Pharmaceutical has more pipeline drugs in late-stage trials than any of the four firms do, with several

of them already under out-licensing deals. The value of the company’s pipeline, however, has been

discounted following a series of negative news flows in 2016—eg, a September cancellation of an out-

licensing deal with Boehringer Ingelheim for HM61713 (olmutinib), a November suspension of

patient recruitment for Phase I trials of HM12525A/JNJ-64565111, and December revisions to an

out-licensing contract with Sanofi for the Quantum Project. This year, Hanmi’s new CEO in

interviews on Feb 13 and May 10 said sample production for efpeglenatide and HM12525A/JNJ-

64565111 will commence soon, allowing global clinical trials to resume. The company’s pipeline may

be reevaluated as drug candidates progress to latter stages of trials and bring in milestone revenue.

Hanmi

Pharmaceutical

2017. 6. 15

107

Top 10 out-licensing contract in global pharm/biotech industry in 2015, by upfront payment

Rank Contract

value

(USDm)

Upfront

payment

(USDm)

Licensor Licensee Project Development

stage

1 1,100 1,000

(150 cash+850 equity)

Juno

Therapeutics Celgene

T-cell therapies for cancer and autoimmune diseases with an initial

focus on chimeric antigen receptor technology (CAR-T) and T-cell

receptor (TCR) technologies

Phase I

2 2,075

725

(300 cash+ 425

equity)

Galapagos Gilead

Sciences

JAK1-selective inhibitor filgotinib for inflammatory disease

indications Phase II

3 2,165 640 Regeneron

Pharmaceuticals Sanofi

PD-1 (programmed death-1) inhibitor and other immuno-oncology

antibodies

Phase I,

Pre-clinical

4 450 450 AstraZeneca Celgene MEDI4736, PD-L1 (programmed death ligand-1) inhibitor program

for blood cancers Phase III

5

4,259

(EUR3,

900m)

437

(EUR400m)

Hanmi

Pharmaceutical Sanofi

Efpeglenatide, a long-acting glucagon-like peptide-1 receptor

agonist (GLP1-RA), weekly insulin and a fixed-dosed weekly GLP-

1-RA/insulin drug combination

Phase II, Phase I,

Pre-clinical

6 1,737 350 Five Prime

Therapeutics

Bristol-Myers

Squibb

Colony stimulating factor 1 receptor (CSF1R) antibody program for

immunology and oncology indications Phase I

7 1,700 300 Lexicon

Pharmaceuticals Sanofi

Sotagliflozin, an oral dual inhibitor of sodium-glucose

cotransporters 1 and 2 (SGLT-1 and SGLT-2), for the treatment of

diabetes

Phase III

8 300 300 Immunomic

Therapeutics

Astellas

Pharma

LAMP-vax products for the treatment or prevention of any and all

allergic diseases in humans Discovery

9 1,275 250 Innate Pharma AstraZeneca IPH2201, an immune checkpoint inhibitor targeting NKG2A Phase II

10 250 250 Merck Allergan Small molecule oral calcitonin gene-related peptide (CGRP)

receptor antagonists for the treatment and prevention of migraine Phase II


Hanmi

Pharmaceutical

2017. 6. 15

108

Innate Pharma: Market cap and major events

Source: Bloomberg, Samsung Securities

Innate Pharma: R&D related events

Date Events

Aug 27, 2014 EMA designates IPH4102 as orphan drug

Oct 6, 2015 Monalizumab starts Phase I/II (combination with ibrutinib)

Dec 17, 2015 Monalizumab starts Phase Ib/II (combination with cetuximab)

Feb 8, 2016 Monalizumab starts Phase I (combination with durvalumab)

Nov 8, 2016 Lirilumab releases fine Phase I/II results (combination with Opdivo) for head and neck cancer patients

Nov 30, 2016 Monalizumab releases positive safety data in Phase I/II for advanced gynecologic malignancies patients

Feb 6, 2017 Lirilumab releases disappointing Phase II results for AML patients

Innate Pharma: Major contracts

Date

Project

Mode of

action

Development

stage

Partner

Contract value

(USDm)

Upfront

payment

(USDm)

Milestone

payments

(USDm)

Royalties

Notes

Feb 5, 2014 Monalizumab

(IPH2201) Anti-NKG2A Phase II Novo Nordisk

EUR22m

+600,000

shares

EUR2m

+600,000

shares

EUR20m Licensed-in

Apr 24, 2015 Monalizumab

(IPH2201) Anti-NKG2A Phase II AstraZeneca 1,275 250 1,025 Double digit Out-licensing

Jan 11, 2016 Bispecific antibodies n/a n/a Sanofi EUR400m n/a EUR400m Undisclosed Co-development


Innate Pharma: R&D pipeline

Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Partner Notes

Lirilumab KIR2DL-1/2/3 Squamous cell carcinoma

of the head and neck Bristol-Myers

Squibb Phase I/II

Solid and hematological

tumors

Phase I/II

(Multiple

combination)

Monalizumab Anti-NKG2A Solid and hematological

tumors AstraZeneca

Phase I/II

(Mono and

combination)

IPH4102 KIR3DL2 Cutaneous T-cell lymphomas

IPH4301 MICA/B Cancer

IPH52 CD39 Cancer

IPH53 CD73 Cancer

IPH33 TLR3 Inflammation

NK bispecific

engagers Undisclosed Cancer Sanofi

Up to two

drugs

Source: Innate Pharma, Samsung Securities

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

100200300

400500600

700800900

1,000

2013 2014 2015 2016 2017

Market cap (LHS) Nasdaq Biotechnology Index (RHS)

(EURm)Apr 24, 2015

Out-licensed IPH2201 to

AstraZeneca

Feb 5, 2014

Licensed-in IPH2201

from Novo Nordisk

Feb 6, 2017

Released disappointing

phase II results

for lirilumab for AML

Nov 8, 2016

Released fine phase I/II results for

lirilumab (combination with Opdivo)

for head and neck cancer

Nov 20, 2013

Financed EUR20m from US

institutional investor specialized

in healthcare sector

Feb 4, 2014,

Initiated coverage at

conviction buy by Goldman Sachs

(pts)

Hanmi

Pharmaceutical

2017. 6. 15

109

Five Prime Therapeutics: Market cap and major events


Five Prime Therapeutics: R&D related events

Date Events

Jan 22, 2016 FPA144 releases Phase I results for gastric cancer (partial response)

Jul 1, 2016 US FDA designates FPA144 as an orphan drug

Jul 15, 2016

GSK exercises option to take an exclusive license to IP related to a target under the respiratory diseases research collaboration

between the companies, triggering a $1.5 million license payment to Five Prime Therapeutics. Five Prime is eligible to receive up

to $92.75 million in contingent milestone payments for each product that incorporates or targets the licensed protein.

Oct 4, 2016 FPA008 starts Phase Ib (combination with Opdivo)

Jan 5, 2017 Extends immune-oncology drug co-development contract with Bristol-Myers Squibb by one year


Five Prime Therapeutics: Major contracts

Date

Project

Mode of

action

Development

stage

Partner

Contract value

(USDm)

Upfront

payment

(USDm)

Milestone

payments

(USDm)

Royalties

Notes

Mar 17, 2014

Immuno-

oncology

therapies

New

target n/a

Bristol-

Myers

Squibb

USD320m+

USD21m share

purchase

USD20m+

USD21m

share

purchase

300Mid-single to

low-double digit

Out-

licensing

May 27, 2015 CAR T cell

therapies

New

target n/a

Bluebird

Bio

Up to USD130m

per product

USD1.5m

per product

Up to USD128.5m

per product Undisclosed

Out-

licensing

Jul 16, 2015 Multi-specific

antibodies

GITR and

other

targets

n/a Inhibrix

Up to USD342.5m

per product

(USD442.5m for

drugs with US

FDA orphan drug

designation)

n/a

Up to USD342.5m

per product

(USD442.5m

for

drugs with US

FDA orphan

drug

designation)

n/a License-

in

Oct 15, 2015 Cabiralizumab

(FPA008) CSF1R Phase I

Bristol-

Myers

Squibb

1,737 350 1,387 Double digit Out-

licensing


0

1,000

2,000

3,000

4,000

5,000

6,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2013 2014 2015 2016 2017


(USDm) Oct 15, 2015

Out-licensed FPA008

to Bristol-Myers Squibb

Nov 24, 2014

Signed a contract with Bristol-Myers

Squibb to do phase I clinical trials of

FPA008, combination with Opdivo

Sep 17, 2013

Listed on Nasdaq

(pts)Mar 17, 2014

Signed a co-development contract

with Bristol-Myers Squibb to develop

immuno-oncology drugs

May 27, 2015

Signed a co-development contract with Bluebird Bio to

develop CAR T cell treatments

Jul 16, 2015

Licensed in Inhibrix's multi-target antibody drugs

Hanmi

Pharmaceutical

2017. 6. 15

110

Five Prime Therapeutics: R&D pipeline

Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Partner Note

Cabiralizumab

(FPA008) CSF1R antibody Multiple tumors

Bristol-Myers

Squibb

Combination

with Opdivo

Pigmented villonodular

synovitis

FPA144 FGFR2b antibody Gastric and bladder cancers

FP-1039 FGF ligand trap Mesothelioma

FPT155 CD80-Fc Multiple tumors

FPA154 Tetravalent GITR

agonist antibody Multiple tumors

FPA150 B7-H4 antibody Multiple tumors

FPA151 BCMA/CD3 bi-

specific antibody Multiple myeloma

Immuno-

oncology Undisclosed Multiple tumors

Bristol-Myers

Squibb

Immuno-

oncology Undisclosed Multiple tumors

Bristol-Myers

Squibb

Source: Five Prime Therapeutics, Samsung Securities

Lexicon Pharmaceuticals: Market cap and major events


Lexicon Pharmaceuticals: R&D related events

Date Events

Oct 9, 2013 Telotristat etiprate fails to deliver meaningful results in a pilot study for ulcerative colitis

Apr 14, 2014 Sotagliflozin releass Phase II results in type I diabetes

Sep 11, 2014 Sotagliflozin releases Phase IIb results in type II diabetes

Mar 2, 2016 Sanofi states it will start Phase III for Sotagliflozin in type II diabetes by end-2016

Mar 16, 2016 Applies for approval of Xermelo with US FDA

May 31, 2016 Receives US FDA Priority Review

Jul 19, 2016 EMA receives application of approval for Xermelo

Sep 9, 2016 Sotagliflozin releases successful Phase III results in type I diabetes

Mar 1, 2017 US FDA approves Xermelo


1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

0

500

1,000

1,500

2,000

2,500

2013 2014 2015 2016 2017


(USDm)Nov 6, 2015

Out-licensed

sotagliflozin to Sanofi

Aug 3, 2015

Released successful phase III

results for telotristat etiprate

Sep 9, 2016

Released successful phase II results for

sotagliflozin in type I diabetes

Oct 1, 2013

Released phase II data proving

LX4211 (sotagliflozin)

reduces blood glucose level

Dec 3, 2013

LX1033, released disappointing

phase II results

(pts)

Hanmi

Pharmaceutical

2017. 6. 15

111

Lexicon Pharmaceuticals: Major contracts

Date

Project

Mode of

action

Development

stage

Partner

Contract value

(USDm)

Upfront

payment

(USDm)

Milestone

payments

(USDm)

Royalties

Notes

Oct 22, 2014 Xermelo

(Telotristat etiprate) TPH inhibitor Phase III Ipsen 145 23 122 Undisclosed Out-licensing

Nov 6, 2015 Sotagliflozin

(LX4211)

SGLT1/SGLT2

inhibitor Phase III Sanofi 1,700 300 1,400

Escalating

double digit Out-licensing


Lexicon Pharmaceuticals: R&D pipelines

Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Approval Partner

LX1606 TPH inhibitor Carcinoid syndrome diarrhea US Ipsen

Sotagliflozin

(LX4211)

SGLT1/SGLT2

inhibitor Type 1 diabetes Sanofi

Type 2 diabetes

LX2761 SGLT1 inhibitor Diabetes

LX9211 AAK1 Neuropathic pain

Source: Five Prime Therapeutics, Samsung Securities

Galapagos: Market cap and major events


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015 2016 2017


(EURm)Dec 17, 2015

Out-licensed filgotinib

to Gilead Sciences

May 19, 2015

ADR listed on Nasdaq

Received milestone payments on progression of

clinical trials and released positive results

Sep 24, 2013

Signed a co-development contract with

Abbvie for cystic fibrosis treatments

Apr 14, 2015

Released positive phase II results for

filgotinib in rheumatoid arthritis

(pts)

Sep 25, 2015

Cancelled a co-develoopment contract with

Abbvie for Crohn's diesesae treatments

Sep 2016

Rumoured Gilead Sciences' acquisition

Hanmi

Pharmaceutical

2017. 6. 15

112

Galapagos: R&D related events

Date Events

Jan 8, 2015 GLPG1205 starts Phase II for ulcerative colitis

Apr 14, 2015 Filgotinib releases positive Phase IIb results in rheumatoid arthritis (DARWIN1)

Apr 27, 2015 Filgotinib releases positive Phase II results in rheumatoid arthritis (DARWIN2)

Sep 25, 2015 Cancels co-development contract with Abbvie for Crohn’s disease treatment; maintains contract for cystic fibrosis

Oct 15, 2015 GLPG2665 releases pre-clinical trial plan as a next generation cystic fibrosis treatment

Dec 7, 2015 Filgotinib releases successful Phase II results for severe Crohn’s disease

Jan 19, 2016 GLPG2222 receives milestone of USD10m on onset of Phase I for Cystic fibrosis

Jan 26, 2016 GLPG1205 fails in Phase IIa clinical trials for ulcerative colitis

Feb 17, 2016 GLPG1837 announces will release Phase II data for cystic fibrosis in 4Q16

Apr 29, 2016 Expands co-development contract with Abbvie for cystic fibrosis treatment; total milestone payments change from USD 350m to USD600m

May 25, 2016 Filgotinib announces start of global Phase III clinical trials

Nov 23, 2016 Filgotinib receives milestone of USD50m on first administration in Phase III clinical trials

Nov 29, 2016 GLPG2737 receives milestone of USD10m on onset of Phase I for cystic fibrosis

Dec 9, 2016 Filgotinib receives milestone of USD10m on first administration in Phase IIb/III clinical trials for ulcerative colitis

Dec 21, 2016 GLPG1837 releases competitive Phase II results for cystic fibrosis

Mar 10, 2017 Filgotinib releases Phase II plans for small bowel Crohn’s disease and fistulizing Crohn’s disease

Mar 22, 2017 GLPG3607 starts Phase I for cystic fibrosis


Galapagos: Major contracts

Date

Project

Mode of

action

Development

stage

Partner

Contract value

(USDm)

Upfront payment

(USDm)

Milestone

payments

(USDm)

Royalties

Notes

Sep 24, 2013 Cystic fibrosis

treatment n/a n/a Abbvie 405 45 360 Double digit Out-licensing

Dec 17, 2015 Filgotinib JAK1-selective

inhibitor Phase II

Gilead

Sciences 2,075

725 (300 cash +

425 equity)1,350 Over 20% Out-licensing

Apr 29, 2016 Cystic fibrosis

treatment n/a n/a Abbvie 240 0 240 Double digit

Expanding

contract


Hanmi

Pharmaceutical

2017. 6. 15

113

Galapagos: R&D pipelines

Project Mode of action Indication Research Pre-clinical Phase I Phase II Phase III Approval Partner

Filgotinib JAK1-selective

inhibitor Rheumatoid arthritis Gilead

Crohn’s disease Gilead

Ulcerative colitis Gilead

Short bowel Crohn’s disease Gilead

Fistulizing Crohn’s disease Gilead

Sjogren’s disease Gilead

Ankylosing spondylitis Gilead

Psoriatic arthritis Gilead

Cutaneous Lupus

Erythematosus Gilead

GLPG1837 Potentiators Cystic fibrosis (CF) Abbvie


GLPG2222 C1 corrector Cystic fibrosis (CF) Abbvie

GLPG2737 C2 corrector Cystic fibrosis (CF) Abbvie


GLPG1690 Selective

autotaxin inhibitor

Idiopathic pulmonary

disease

GLPG1972 ADAMTS-5

inhibitor Osteoarthritis Servier

MOR106 IL-17C Atopic dermatitis MorphoSys

GLPG2938 Undisclosed Idiopathic pulmonary

disease

GLPG2534 Undisclosed Atopic dermatitis

Source: Galapagos, Samsung Securities

Hanmi

Pharmaceutical

2017. 6. 15

114

Hanmi Pharmaceutical: R&D pipeline

Category

Project

Indication

Pre-

clinical

Phase

l

Phase

ll

Phase

lll

Remarks

Biologic

LAPS Exendin4 (efpeglenatide) Diabetes, obesity Quantum Project, out-licensed to Sanofi

LAPS Insulin Combo (HM14220) Diabetes, obesity

LAPS Insulin115 (HM12470) Diabetes

LAPS GCSF

(Rolontis, eflapegrastim) Neutropenia Out-licensed to Spectrum Pharmaceuticals

LAPS hGH (efpegsomatropin) Growth hormone deficiency

LAPS GLP/GCG (HM12525A) Diabetes, obesity Out-licensed to Janssen

(Johnson & Johnson)

LAPS Triple Agonist (HM15211)

Obesity Developed by Bejing Hanmi

LAPS GCG Analog (HM15136)

Congenital hyperinsulinism Applied LAPScovery

LAPS IDS (HM15410)

Mucopoysaccharidosis Applied LAPScovery

LAPS GLP-2 Analog (HM15410)

Short bowel syndrome Applied LAPScovery

HM21001 GMB stem cell therapy Co-developing with Ajou University

BH2950 Breast/gastric cancer Developed by Bejing Hanmi

BH2922 NSCLC/colorectal cancer Developed by Bejing Hanmi

BH2941 Cancer Developed by Bejing Hanmi

New chemical

Poziotinib

(HM781-36B) Breast cancer

Out-licensed to Spectrum Pharmaceuticals

and Luye Pharma in China

Olmutinib (HM61713) NSCLC Out-licensed to ZaiLab in China

Luminate Retinal diseases Licensed in from US bio venture Allegro

Oraxol Gastric cancer Out-licensed to Athenex

HM71224 Rheumatoid arthritis Out-licensed to Eli Lilly

HM95573 Solid cancer Out-licensed to Genentech

KX2-391 Solid cancer Licensed-in from Athenex

Oratecan Solid cancer Out-licensed to Athenex

HM43239 Acute myeloid leukemia

Incrementally

modified

or

fixed-dose

combination

HGP1207 Pulmonary hypertension

HCP1105 Non-HDL decline of patients

with combined dyslipidemia

HCP1305 Hypertension/dyslipidemia

HCP1401 Hypertension

HCP1303 Prostatic hyperplasia,

erectile dysfunction

HCP1405 Osteoporosis

HCP1202 COPD

HIP1302 Anti-virus

HIP1503 Overactive bladder


Hanmi

Pharmaceutical

2017. 6. 15

115

R&D milestones

Category Project Description Progress

Quantum

Project

(diabetes

drug)

LAPS Exendin4

(efpeglenatide)

GLP-1, targets diabetes

and obesity

Late Phase ll clinical trials underway in nine countries (including US, EU members, and Korea)

Weekly T2DM* Phase ll completed

Monthly T2DM Phase ll interim analysis completed

Weekly/biweekly obesity Phase ll interim analysis completed

Presented at ADA in Jun 2015

Signed out-licensing contract with Sanofi (Nov 2015)

LAPS Insulin

Combo

Insulin combo;

administered weekly

Pre-clinical trials currently underway



New

biologic

LAPS Insulin115

(HM12470A)

Long-acting insulin;

administered weekly

US clinical trials began



LAPS GLP/GCG

(HM12525A

JNJ-6456111)

Long-acting diabetes &

obesity treatment,

administered weekly

Phase l clinical trials underway globally

Signed out-licensing contract with Janssen

New

chemical

Olmutinib

(HM61713)

Anti-cancer drug targeting

non-small cell lung cancer

Made presentation on Phase l clinical trials at ASCO (Jun 2015)

Signed out-licensing contract with Boehringer Ingelheim (Jul 2015)

Signed out-licensing contract with ZaiLab in China (Nov 2015)

Poziotinib

(HM781-36B)

Anti-cancer drug targeting

non-small cell lung cancer

Phase ll clinical trials underway on lung cancer and terminal breast cancer patients

Signed out-licensing contract with Spectrum Pharmaceuticals in US (Mar 2015)

Signed out-licensing contract with Luye Pharma in China (Aug 2015)

HM71224

Rheumatoid arthritis/

auto-immune disease

treatment

Phase lI clinical trials in Europe currently underway

Made presentation on Phase l clinical trials at EULAR (Jun 2015)

Signed out-licensing contract with Eli Lilly (Mar 2015)

HM95573 Urinary system treatment In Phase l trials for solid tumor cancer; signed out-licensing deal with Genentech (Sep 2016)

Note: * Type II diabetes mellitus


Global partnerships

Year Partner Drug (or technology) Remarks

2009 MSD Amosartan World’s first amlodipine + losartan combination drug

2011 Kinex Oral Platform Tech

(Oral Paclitaxel/Irintotecan) Co-development and exclusive marketing rights

2012 Spectrum Pharmaceuticals Eflapegrastim Co-development and exclusive global marketing rights, excluding Korea, China, and Japan

2013 Sanofi Rovelito Co-development and exclusive marketing rights (commercialized)

2014 Luye Pharma Poziotinib (Pan-HER inhibitor) Co-development and exclusive marketing rights in China

2015

Spectrum Pharmaceuticals Poziotinib (Pan-HER inhibitor) Co-development and exclusive global marketing rights, excluding Korea and China

Eli Lilly HM71224 (BTK Inhibitor) Co-development and exclusive global marketing rights, excluding Korea and China

Boehringer Ingelheim HM61713

(3rd-generation EGFR TKI)

Co-development and exclusive global marketing rights excluding Korea, China,

and Hong Kong → deal canceled in Sep 2016

Sanofi Quantum Project Co-development and exclusive global marketing rights

→ deal on LAPS-Insulin canceled in Dec 2016

Janssen (Johnson & Johnson) HM12525A

(GLP/GCG dual agonist) Co-development and exclusive global marketing rights, excluding Korea and China

ZaiLab HM61713

(3rd-generation EGFR TKI) Co-development and exclusive marketing rights in China

2016 Genentech (Roche) HM95573 (RAF inhibitor) Co-development and exclusive global marketing rights, excluding Korea


Hanmi

Pharmaceutical

2017. 6. 15

116

2017 clinical trial plans

Category Phase l Phase ll Phase lll

Biologic Hanmi (LAPS Insulin Combo)

Janssen (HM12525A/JNJ-6456111) Hanmi (HM12470)

Sanofi (efpeglenatide)

Spectrum (eflapegrastim)

Hanmi (HM10560A)

New chemical Genentech (HM95573)

Spectrum (Poziotinib)

Eli Lilly (HM71224)

ZAI Lab (HM61713)


R&D pipeline highlights

Pipeline Description Clinical stage Remarks

HM10560A Long-acting rhGH with comparable efficacy to

daily rhGH

Completed Phase ll clinical trials on

adult growth hormone deficiency

Presented results of domestic Phase l

clinical trials and interim results of global

Phase ll clinical trials at US ENDO

Value-added

programs

To develop fixed-dose combinations on back of

technological prowess for IMD development

Plans to launch five new products in 2017,

developing six more


Raising target to KRW450,000; top pharmaceutical pick: We estimate Hanmi’s operating

value at KRW1.58t based on the sum of its: 1) parent operating value of KRW1.11t; 2) equity holdings

in Beijing Hanmi of KRW412.4b; and 3) equity holdings in Hanmi Fine Chemical of KRW50.8b. Our

estimate seems reasonable considering Hanmi’s market cap averaged KRW1.29t in the 30 days prior

to its first out-licensing contract in 2015. We value the company’s pipeline drugs at KRW3.35t,

putting the value of efpeglenatide (Phase III) at KRW1.85t, HM71224 (Phase II) at KRW372.3b,

HM12525A (Phase I) at KRW321.9b, LASP insulin combo (Phase I) at KRW226.7b, HM95573

(Phase I) at KRW76.8b, and others (Rolontis, poziotinib, olmutinib, and efpegsomatropin) at a

combined KRW500b. Our estimates are not aggressive, but simply assume that efpeglenatide and

HM12525A/JNJ-64565111 enter global Phase III and I trials, respectively. Galapagos, which signed a

USD2.075b out-licensing deal, saw the value of its pipeline rise to USD4b after starting global Phase

III trials. We raise our target price to KRW450,000, and present the stock as our top pharmaceutical

pick.

Hanmi

Pharmaceutical

2017. 6. 15

117

Sum-of-the-parts valuation

(KRWb) Remarks

Operating value (A=BxC) 1,114.2

2017E sales (B) 742.8

P/S multiple (x) (C) 1.5 Kospi Medical Supplies Index P/S*: 1.5x

Non-operating value (D=E+L) 3,813.8

Subsidiaries (E=F+I) 463.2

Beijing Hanmi (F=GxHx74%) 412.4 74% stake

2017E net profit (G) 22.3

P/E multiple (x) (H) 25.0

Hanmi Fine Chemical (I=JxKx63%) 50.8 63% stake

2017E net profit (J) 8.1

P/E multiple (x) (K) 10.0

New drugs (L=M+N+O+P+Q+R) 3,350.6

Efpeglenatide (M) 1,853.0

HM71224 (N) 372.3

HM12525A (O) 321.9

LAPS Insulin Combo (P) 226.7

HM95573 (Q) 76.8

Others (Rolontis, Poziotinib, Olmutinib, Efpegsomatropin) (R) 500.0

Net cash (S) (2.5)

Fair equity value (T=A+D+S) 4,930.6

Number of common shares (‘000) (U) 11,163

Target price (KRW) (T/U) 441,691

Note: * Excludes Samsung Biologics


Revisions to full-year forecasts

(KRWb) 2017E 2018E

Old New Diff (%) Old New Diff (%)

Sales 915.1 915.1 (0.0) 950.6 950.6 0.0

Operating profit 73.4 73.4 (0.0) 77.2 88.0 14.0

Pre-tax profit 69.3 69.8 0.8 73.6 84.4 14.7

Net profit 62.4 62.9 0.8 66.2 76.0 14.7


Hanmi

Pharmaceutical

2017. 6. 15

118

Forward P/E band Forward P/B band

Source: QuantiWise, Samsung Securities estimates Source: QuantiWise, Samsung Securities estimates

Ownership structure


Hanmi Science:41.4%

Dong Kuk Shin:7.6%

National Pension Service:

6.1%

Other:45.0%

0

200,000

400,000

600,000

800,000

1,000,000

2012 2013 2014 2015 2016 2017

(KRW)

10x

50x

90x

130x

0

200,000

400,000

600,000

800,000

1,000,000

2012 2013 2014 2015 2016 2017

(KRW)

1.0x

5.0x

9.0x

13.0x

Hanmi

Pharmaceutical

2017. 6. 15

119

Hanmi Pharm: Results and forecasts (consolidated)

(KRWb) 1Q16 2Q16 3Q16 4Q16 2016 1Q17 2Q17E 3Q17E 4Q17E 2017E

Sales 256.4 234.5 219.7 172.1 882.7 233.6 231.4 221.9 228.1 915.2

Chg (% y-y) 19.4 (4.1) (18.1) (70.8) (33.0) (8.9) (1.3) 1.0 32.5 3.7

Hanmi Pharm 195.4 191.4 177.1 123.7 687.7 178.1 191.6 181.2 191.9 742.8

Chg (% y-y) 23.9 (4.0) (16.7) (77.2) (38.2) (8.9) 0.1 2.3 55.1 8.0

Domestic 142.9 145.6 135.1 155.1 578.7 141.9 155.7 152.4 163.1 613.1

Chg (% y-y) 5.3 20.3 (0.8) 15.8 9.8 (0.7) 6.9 12.8 5.2 5.9

Exports 19.5 24.5 17.2 20.1 81.3 18.9 27.0 19.8 19.8 85.5

Chg (% y-y) 4.8 4.0 2.7 34.0 10.0 (3.1) 10.0 15.1 (1.5) 5.1

Upfront and milestone revenue 33.0 21.3 24.8 (51.5) 27.7 17.3 9.0 9.0 9.0 44.3

Chg (% y-y) 871.9 (61.1) (58.5) (113.1) (94.6) (47.6) (57.8) (63.8) (117.5) 59.9

Beijing Hanmi 60.0 42.3 42.6 47.9 192.8 55.6 39.8 40.7 36.2 172.4

Chg (% y-y) 9.4 (7.2) (22.2) (3.2) (5.8) (7.3) (5.8) (4.4) (24.3) (10.6)

Mamiai 22.0 17.6 19.8 10.7 70.1 20.2 17.6 18.1 10.6 66.6

Chg (% y-y) (2.2) 5.1 (18.3) (38.7) (13.4) (8.2) 0.2 (8.5) (0.7) (5.0)

Mechanan 4.0 3.5 3.4 1.8 12.7 2.8 3.4 3.4 1.7 11.2

Chg (% y-y) (21.7) (36.4) (49.8) (61.7) (42.6) (28.5) (5.3) (1.5) (7.4) (11.8)

Itanzing 21.8 11.9 9.2 19.2 62.2 19.1 10.1 8.4 19.7 57.3

Chg (% y-y) 15.2 (14.8) (29.4) 1.0 (4.4) (12.3) (15.4) (8.9) 2.4 (7.8)

Other 9.8 9.3 10.1 16.1 45.3 11.1 8.8 10.8 4.2 34.9

Chg (% y-y) 17.8 (0.5) (4.7) 96.3 24.2 12.7 (5.1) 6.7 (73.9) (23.1)

Gross profit 143.8 126.3 123.0 67.7 460.9 134.4 124.6 116.9 113.2 489.1

Chg (% y-y) 23.4 (14.0) (28.4) (86.0) (49.9) (6.5) (1.3) (5.0) 67.2 6.1

Gross margin (%) 56.1 53.8 56.0 39.4 52.2 57.5 53.8 52.7 49.6 53.4

R&D expenses 37.0 36.0 36.8 33.0 142.9 36.5 39.3 39.3 39.3 157.2

Chg (% y-y) (12.3) (17.1) (4.9) (24.3) (14.9) (1.2) 9.1 6.7 18.9 10.0

R&D expenses-to-sales (%) 14.4 15.4 16.8 19.2 16.2 15.6 17.0 17.7 17.2 17.2

Operating profit 22.6 6.4 13.8 (16.0) 26.8 31.4 14.4 15.1 12.6 73.4

Chg (% y-y) 968.7 161.3 (61.5) Turned neg (87.4) 39.0 124.7 9.4 To turn pos 174.1

Operating margin (%) 8.8 2.7 6.3 (9.3) 3.0 13.4 6.2 6.8 5.5 8.0

Pre-tax profit 34.9 21.4 0.7 (49.0) 8.0 29.2 13.5 14.1 13.1 69.8

Chg (% y-y) 139.5 1,016.3 (97.9) Turned neg (96.2) (16.3) (37.1) 1,933.2 To turn pos 773.3

Pre-tax margin (%) 13.6 9.1 0.3 (28.4) 0.9 12.5 5.8 6.4 5.7 7.6

Net profit 41.0 21.4 6.3 (38.3) 30.3 24.6 12.1 12.7 13.4 62.9

Chg (% y-y) 152.8 69.7 Turned pos Turned neg (81.3) (39.9) (43.3) 101.9 To turn pos 107.5

Net margin (%) 16.0 9.1 2.9 (22.3) 3.4 10.6 5.2 5.7 5.9 6.9

Net profit attributable to

controlling shareholders 38.1 20.1 4.8 (39.6) 23.3 18.9 9.3 9.8 10.3 48.4

Chg (% y-y) 200.7 78.4 Turned pos Turned neg (84.9) (50.3) (53.6) 104.6 To turn pos 107.5

Net margin attributable to

controlling shareholders (%) 14.9 8.6 2.2 (23.0) 2.6 8.1 4.0 4.4 4.5 5.3


Revenue from out-licensing deals

Reflected Project Partner Type Value (KRWb) Recognition

2Q15 HM71224 Eli Lilly Upfront fee 54.8 Lump-sum

3Q15 HM61713 Boehringer Ingelheim Upfront fee 59.8 Lump-sum

4Q15 HM61713 Boehringer Ingelheim Milestone fee 17.1 Lump-sum

4Q15 HM12525A Janssen (Johnson& Johnson) Upfront fee 121.6 Lump-sum

4Q15 Quantum Project Sanofi Upfront fee 255.6 Distributed

4Q16 HM95573 Genentech Upfront fee 93.6 Distributed

4Q16 Quantum Project Sanofi Upfront fee 63.9 Returned

Note: Sales recognition based on GAAP and general practices of global pharmaceutical sector; values exclude 30% of total payment going to Hanmi Science


Hanmi

Pharmaceutical

2017. 6. 15

120

Hanmi Pharm: Results and forecasts (parent basis)


Sales 195.4 191.4 177.1 123.7 687.7 178.1 191.6 181.2 191.9 742.8

Chg (% y-y) 23.9 (4.0) (16.7) (77.2) (38.2) (8.9) 0.1 2.3 55.1 8.0

Domestic 142.9 145.6 135.1 155.1 578.7 141.9 155.7 152.4 163.1 613.1

Chg (% y-y) 5.3 20.3 (0.8) 15.8 9.8 (0.7) 6.9 12.8 5.2 5.9

Exports 19.5 24.5 17.2 20.1 81.3 18.9 27.0 19.8 19.8 85.5

Chg (% y-y) 4.8 4.0 2.7 34.0 10.0 (3.1) 10.0 15.1 (1.5) 5.1

Operating profit 9.3 (0.0) 5.9 (20.0) (4.4) 15.7 9.7 8.4 9.3 42.5

Chg (% y-y) Turned pos Remained neg (79.3) Turned neg Turned neg 69.1 To turn pos 43.3 To turn pos 흑전Operating margin (%) 4.7 (0.0) 3.3 (16.1) (0.6) 8.8 5.1 4.6 4.8 5.7

Net profit 29.8 16.6 (0.1) (42.9) 3.7 11.2 8.7 7.3 11.2 32.5

Chg (% y-y) 745.7 109.8 Remained neg Turned neg (97.2) (62.2) (47.2) To turn pos To turn pos 778.2

Net margin (%) 15.2 8.6 (0.1) (34.7) 0.5 6.3 4.6 4.0 5.8 4.4


Beijing Hanmi: Results and forecasts


Sales 60.0 42.3 42.6 47.9 192.8 55.6 39.8 40.7 36.2 172.4

Chg (% y-y) 9.4 (7.2) (22.2) (3.2) (5.8) (7.3) (5.8) (4.4) (24.3) (10.6)

Mamiai 22.0 17.6 19.8 10.7 70.1 20.2 17.6 18.1 10.6 66.6

Chg (% y-y) (2.2) 5.1 (18.3) (38.7) (13.4) (8.2) 0.2 (8.5) (0.7) (5.0)

Mechanan 4.0 3.5 3.4 1.8 12.7 2.8 3.4 3.4 1.7 11.2

Chg (% y-y) (21.7) (36.4) (49.8) (61.7) (42.6) (28.5) (5.3) (1.5) (7.4) (11.8)

Itanzing 21.8 11.9 9.2 19.2 62.2 19.1 10.1 8.4 19.7 57.3

Chg (% y-y) 15.2 (14.8) (29.4) 1.0 (4.4) (12.3) (15.4) (8.9) 2.4 (7.8)

Other 9.8 9.3 10.1 16.1 45.3 11.1 8.8 10.8 4.2 34.9

Chg (% y-y) 17.8 (0.5) (4.7) 96.3 24.2 12.7 (5.1) 6.7 (73.9) (23.1)

Operating profit 14.4 4.5 7.1 2.7 28.2 14.7 4.0 6.1 2.7 27.8

Chg (% y-y) 8.6 11.1 (7.3) (50.0) (7.0) 2.1 (11.5) (14.0) 0.7 (1.5)

Operating margin (%) 24.0 10.6 16.7 5.6 14.6 26.4 10.0 15.0 7.5 16.1

Net profit 12.5 4.1 6.2 3.3 25.7 12.1 3.0 5.1 1.8 22.3

Chg (% y-y) 8.7 14.4 (8.1) (37.7) (5.3) (3.2) (27.1) (17.9) (45.1) (13.3)

Net margin (%) 20.8 9.7 14.6 6.9 13.3 21.8 7.5 12.5 5.0 12.9


Hanmi Fine Chem: Results and forecasts


Sales 21.9 25.6 21.8 23.7 93.0 21.9 25.6 21.8 23.7 93.0

Chg (% y-y) (2.8) (7.7) 9.3 25.4 4.4 0.0 0.0 0.0 0.0 0.0

Operating profit (1.1) 1.9 0.8 1.3 2.9 1.3 0.6 0.5 0.6 3.1

Chg (% y-y) Turned neg 19.1 Turned pos Turned pos 212.2 Turned pos (66.3) (31.9) (54.4) 6.1

Operating margin (%) (5.0) 7.4 3.7 5.5 3.1 5.9 2.5 2.5 2.5 3.3

Net profit (1.3) 0.7 0.2 1.3 0.9 7.0 0.4 0.3 0.4 8.1

Chg (% y-y) Turned neg (39.3) Turned pos Turned pos (17.4) Turned pos (45.1) 63.5 (72.7) 796.3

Net margin (%) (5.9) 2.7 0.9 5.5 1.0 32.0 1.5 1.5 1.5 8.7


Hanmi

Pharmaceutical

2017. 6. 15

121

Valuation comparison: Major out-licensing firms in 2015

(USDm) Hanmi Pharmaceutical Innate Pharma Five Prime Therapeutics Lexicon Pharmaceuticals Galapagos

Country Korea France US US Belgium

Share price (USD) 326.8 13.4 29.8 14.4 84.9

Market cap 3,648 726 858 1,512 4,314

Sales 2016 761 62 31 83 168

2017E 842 90 47 95 155

2018E 919 83 67 160 227

Operating profit 2016 23 8 (99) (137) (13)

2017E 60 26 (121) (148) (107)

2018E 94 2 (116) (137) (80)

EBITDA 2016 57 12 (93) (135) (8)

2017E 112 63 n/a (161) (68)

2018E 139 38 n/a (20) (27)

Net profit 2016 20 14 (66) (141) 60

2017E 45 34 (109) (148) (75)

2018E 64 16 (120) (118) (47)

EPS (USD) 2016 1.8 0.3 (2.4) (1.4) 1.3

2017E 4.1 0.8 (4.3) (1.4) (1.6)

2018E 5.3 0.5 (4.0) (1.0) (1.0)

P/E (x) 2016 136.3 63.5 n/a n/a 51.6

2017E 79.4 16.6 n/a n/a n/a

2018E 62.3 25.7 n/a n/a n/a

P/B (x) 2016 4.8 9.1 3.5 9.2 3.7

2017E 5.8 4.3 n/a 17.8 3.7

2018E 5.3 3.5 n/a 18.0 3.5

EV/EBITDA (x) 2016 52.3 55.0 n/a n/a n/a

2017E 34.8 8.4 n/a n/a n/a

2018E 28.0 14.0 n/a n/a n/a

ROE (%) 2016 3.5 16.0 (15.9) (63.8) 9.6

2017E 8.2 51.7 n/a (146.9) (6.1)

2018E 10.1 22.7 n/a (149.1) 2.8

Absolute return (%) 1-week (0.3) 4.7 (1.3) (0.6) (1.8)

1-month 20.1 8.9 (17.0) (7.7) (7.2)

3-months 15.4 21.1 (36.9) (10.2) 12.0

6-months 7.6 (13.0) (49.7) (5.4) 33.2

1-year (36.2) (4.3) (35.5) 5.3 44.7

Year-to-date 29.8 (15.5) (42.2) 4.2 22.5

Relative return (%) 1-week 3.8 2.2 (2.8) (1.0) (0.2)

1-month 13.0 7.6 (18.0) (8.9) (8.4)

3-months 3.0 10.3 (38.3) (12.1) 5.2

6-months (8.9) (25.3) (54.1) (13.7) 15.4

1-year (46.4) (18.7) (44.0) (8.5) 23.9

Year-to-date 12.2 (22.9) (46.5) (3.4) 12.2

Note: As of May 29 close and forex


Hanmi

Pharmaceutical

2017. 6. 15

122

Income statement

Year-end Dec 31(KRWb) 2015 2016 2017E 2018E 2019E

Sales 1,318 883 915 951 977

Cost of goods sold 398 422 426 446 465

Gross profit 919 461 489 505 512

Gross margin (%) 69.8 52.2 53.5 53.1 52.4

SG&A expenses 707 434 416 417 428

Operating profit 212 27 73 88 84

Operating margin (%) 16.1 3.0 8.0 9.3 8.6

Non-operating gains (losses) (2) (19) (4) (4) (2)

Financial profit 1 8 5 3 4

Financial costs 12 10 8 7 7

Equity-method gains (losses) 0 0 0 0 0

Other 9 (17) 0 0 0

Pre-tax profit 210 8 70 84 82

Taxes 48 (22) 7 8 8

Effective tax rate (%) 22.7 (278.9) 10.0 10.0 10.0

Profit from continuing operations 162 30 63 76 73

Profit from discontinued operations 0 0 0 0 0

Net profit 162 30 63 76 73

Net margin (%) 12.3 3.4 6.9 8.0 7.5

Net profit (controlling interests) 154 23 48 58 57

Net profit (non-controlling interests) 8 7 14 17 17

EBITDA 262 66 115 129 122

EBITDA margin (%) 19.9 7.4 12.6 13.5 12.5

EPS (parent-based) (KRW) 13,835 2,089 4,335 5,239 5,068

EPS (consolidated) (KRW) 14,517 2,714 5,631 6,805 6,583

Adjusted EPS (KRW)* 13,835 2,089 4,335 5,239 5,068

Cash flow statement


Cash flow from operations 102 413 78 117 112

Net profit 162 30 63 76 73

Non-cash profit and expenses 121 72 53 53 49

Depreciation 27 36 39 38 36

Amortization 23 3 3 3 2

Other 70 33 12 12 11

Changes in A/L from operating activities (118) 332 (26) 1 0

Cash flow from investments (114) (355) 106 (42) (26)

Change in tangible assets (119) (200) (72) (30) (10)

Change in financial assets 6 (145) 178 (12) (16)

Other (1) (11) 0 0 0

Cash flow from financing 95 (63) (94) 0 0

Change in debt 95 (35) (94) 0 0

Change in equity (0) 0 0 0 0

Dividends 0 (20) 0 0 0

Other (1) (7) 0 0 0

Change in cash 86 (8) 91 75 86

Cash at beginning of year 52 138 130 221 296

Cash at end of year 138 130 221 296 382

Gross cash flow 283 102 116 128 122

Free cash flow (19) 213 6 87 102

Note: * Excluding one off items, ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation


Balance sheet


Current assets 1,145 841 800 906 1,023

Cash & equivalents 138 130 221 296 382

Accounts receivable 778 250 337 350 360

Inventories 158 190 151 157 161

Other current assets 71 269 91 103 120

Fixed assets 577 756 788 779 752

Investment assets 54 43 45 47 48

Tangible assets 416 599 632 624 599

Intangible assets 67 40 37 34 32

Other long-term assets 41 74 74 74 74

Total assets 1,723 1,597 1,588 1,686 1,775

Current liabilities 674 544 467 482 493

Accounts payable 56 51 55 57 59

Short-term debt 37 77 77 77 77

Other current liabilities 580 416 334 347 357

Long-term liabilities 304 318 324 330 335

Bonds & long-term debt 263 159 159 159 159

Other long-term liabilities 42 159 165 171 176

Total liabilities 978 862 791 812 828

Owners of parent equity 675 659 708 766 823

Capital stock 26 26 26 26 26

Capital surplus 418 417 417 417 417

Retained earnings 228 229 277 336 392

Other 3 (13) (13) (13) (13)

Non-controlling interests’ equity 70 75 90 107 124

Total equity 745 735 797 873 947

Net debt 185 2 (3) (88) (189)

Financial ratios

Year-end Dec 31 2015 2016 2017E 2018E 2019E

Growth (%)

Sales 73.1 (33.0) 3.7 3.9 2.8

Operating profit 514.8 (87.4) 174.1 19.9 (4.4)

Net profit 274.3 (81.3) 107.5 20.9 (3.3)

Adjusted EPS** 330.1 (84.9) 107.5 20.9 (3.3)

Per-share data (KRW)

EPS (parent-based) 13,835 2,089 4,335 5,239 5,068

EPS (consolidated) 14,517 2,714 5,631 6,805 6,583

Adjusted EPS** 13,835 2,089 4,335 5,239 5,068

BVPS 60,573 59,234 63,580 68,833 73,915

DPS (common) 2,000 0 0 0 0

Valuations (x)

P/E*** 26.3 174.2 84.0 69.5 71.8

P/B*** 6.0 6.1 5.7 5.3 4.9

EV/EBITDA 16.5 63.1 36.1 31.7 32.7

Ratios (%)

ROE 25.7 3.5 7.1 7.9 7.1

ROA 11.8 1.8 3.9 4.6 4.2

ROIC 20.6 12.2 8.1 9.4 9.2

Payout ratio 13.2 0.0 0.0 0.0 0.0

Dividend yield (common) 0.5 0.0 0.0 0.0 0.0

Net debt to equity 24.9 0.3 (0.3) (10.1) (19.9)

Interest coverage (x) 17.3 2.7 8.9 12.8 12.3

2017. 6. 15

Samsung Biologics (207940)

Well on the way to long-term growth

● With progress at its third plant well underway, Samsung Biologics should be able

to receive more orders and bolster its USD3.2b backlog. The firm is aiming to

change into a contract development and manufacturing organization and cut costs.

● The company holds the world’s largest lineup of biosimilars approved in US or

Europe, and expects to receive three more approvals in 2H. ● Samsung Biologics is our top biotech pick for its high growth potential.

WHAT’S THE STORY?

More orders ahead: Samsung Biologics should complete its third plant in 4Q17 and the

related validation process in 4Q18. The new facility will boost the company’s capacity to 360,000 liters or 32.7% of the estimated total for global bio CMOs in 2020. The firm has a CMO order

backlog of USD3.2b, is in talks with more than 15 global pharmaceutical players for over 30 CMO

contracts, and should pursue even more orders when construction of its plant completes this year.

Aiming to become a CDMO, cut costs: At the request of CMO clients, Samsung Biologics is

aiming to transform from a CMO to a contract development and manufacturing organization

(CDMO), and is likely to provide R&D, quality control, and quality assurance services. The

company is also striving to cut costs enterprise wide in areas such as supply chain management,

including increasing logistic efficiency.

More approvals ahead: Subsidiaries Samsung Bioepis and Archigen Biotech develop

biosimilars and boast the world’s largest lineup of approved products in the US and Europe.

Samsung Bioepis’ EMA approved products include Enbrel biosimilar Benepali, Remicade

biosimilar Flixabi, and Lantus biosimilar Lusduna, noting Flixabi is also approved by the US FDA.

According to Biogen, European sales of Benepali and Flixabi rose a respective 3,200% y-y and

24.5% q-q to a combined USD66m in 1Q17; and a May 4 article on PR Newswire estimated

Benepali’s European market share at 25%. Samsung Bioepis expects to receive more approvals in

2H, having filed in 2016 for US FDA approval of Lantus biosimilar Lusduna in August, and for

EMA approvals of Humira and Herceptin biosimilars in July and October, respectively.

Biotech top pick: Samsung Biologics expects to hit an operating BEP this year on y-y sales

growth of 50% to KRW441.9b, backed by utilization of 100% at its #1 plant and 40% at its #2

facility. We expect quarterly results to improve markedly from 2H through 2018, noting the

company conducted its biennial plant maintenance from late-2016 into early-2017. Believing the

firm’s flagship business is on track, we normalize our target P/E and raise our target price to

KRW260,000. Samsung Biologics our top biotech pick.

Company Update


2016 2017E 2018E 2019E

Revenue (KRWb) 295 441 540 932

Net profit (adj) (KRWb) (177) (63) 22 274

EPS (adj) (KRW) (3,113) (953) 335 4,145

EPS (adj) growth (% y-y) nm nm nm 1,138.9

EBITDA margin (%) 10.1 24.4 25.9 43.0

ROE (%) (5.2) (1.6) 0.5 6.6

P/E (adj) (x) n/a n/a 638.2 51.5

P/B (x) 3.5 3.5 3.5 3.3

EV/EBITDA (x) 525.7 155.3 124.8 44.7

Dividend yield (%) 0.0 0.0 0.0 0.0


Brian Lee

Analyst


Wonyong Park

Research Associate

[email protected]

822 2020 7847

AT A GLANCE




Shares (float) 66,165,000 (21.7%)



KRW35.2b/ USD31.4m


1M 6M 12M

Samsung Biologics (%) 18.0 31.8 0.0

Vs Kospi (%pts) 10.6 10.5 0.0

KEY CHANGES

(KRW) New Old Diff

Recommend. BUY BUY

Target price 260,000 230,000 13.0%

2017E EPS -953 -1,006 n/a

2018E EPS 335 327 2.4%


No of estimates 3


Recommendation 4.0



May 26

Samsung Biologics

2017. 6. 15

124

Revisions to full-year forecasts

(KRWb) 2017E 2018E

Old New Diff (%) Old New Diff (%)

Sales 440.6 440.6 0.0 540.3 539.5 (0.1)

Operating profit 10.9 17.8 63.8 32.7 40.1 22.6

Pre-tax profit (87.0) (82.3) To remain neg 28.3 28.9 2.2

Net profit (66.6) (63.0) To remain neg 21.6 22.1 2.2


Target-price calculation

(KRWb) 2020E 2021E 2022E Note

Fair equity value (A=B+F×50%) 10,888 17,547 22,088

Parent business (B=C×E) 5,346 10,032 12,729

Present value of net profit (C=D/(1+0.1)^n) 214 401 509 Applies 10% discount rate

Net profit (D) 285 534 678 Excludes equity method gains

Target P/E (E) 25 25 25 Lonza’s P/E

Samsung Bioepis (F=G×I) 11,084 15,031 18,718 Assumes 50% stake + 1 share

Present value of net profit (G= H/(1+0.1)^n) 317 429 535 Applies 10% discount rate

Net profit (H) 422 572 712

Target P/E (I) 35 35 35 Celltrion’s P/E

Shares outstanding (J, ‘000) 66,165 66,165 66,165

Fair price (K=A/J, KRW) 164,558 265,206 333,830

Target-price (KRW) 254,532 Averages 2020-2022E fair prices


Samsung Biologics

2017. 6. 15

125

Samsung Biologics: Full-year forecasts


Results and forecasts


Sales 88.8 47.6 52.8 105.5 294.6 107.6 78.1 117.7 137.2 440.6

Chg (% y-y) 222.8 21.3 64.2 122.8 30.0 49.5

Gross profit n/a n/a 2.0 16.7 26.5 17.7 3.2 27.7 47.3 95.8

Chg (% y-y) Turned pos n/a n/a 1,285.4 183.0 261.2

Gross margin (%) 3.8 15.8 9.0 16.4 4.0 23.6 34.4 21.8

Operating profit (13.7) (3.3) (12.8) (0.7) (30.4) 3.4 (11.4) 8.2 17.5 17.8

Chg (% y-y) Remained neg Turned pos To remain neg To turn pos To turn pos To turn pos

Operating margin (%) (15.4) (6.9) (24.2) (0.7) (10.3) 3.2 (14.5) 7.0 12.8 4.0

Pre-tax profit (30.2) (68.6) (57.3) (74.8) (230.9) (39.8) (17.6) (15.4) (9.5) (82.3)

Chg (% y-y) Turned neg Remained neg To remain neg To remain neg To remain neg To remain neg

Pre-tax margin (%) (34.1) (144.1) (108.5) (70.9) (78.4) (37.0) (22.6) (13.1) (6.9) (18.7)

Net profit (25.7) (50.0) (44.1) (57.0) (176.8) (33.1) (13.8) (11.5) (4.6) (63.0)

Chg (% y-y) 0.0 0.0 0.0 0.0 Turned neg Remained neg To remain neg To remain neg To remain neg To remain neg

Net margin (%) (29.0) (105.2) (83.5) (54.0) (60.0) (30.7) (17.6) (9.8) (3.4) (14.3)

Note: Parent basis


441 540

932 1,242

1,588 1,934

18 40

304 481

646 819

(63)

22 274

495 820

1,034

(20)(10)0102030405060

(500)

0

500

1,000

1,500

2,000

2,500

2017E 2018E 2019E 2020E 2021E 2022E

Sales (LHS) Operating profit (LHS)

Net profit (LHS) Operating margin (RHS)

Net margin (RHS)

(KRWb) (%)

Samsung Biologics

2017. 6. 15

126

CMO sales results and forecasts

(KRWb) 2016 2017E 2018E 2019E 2020E 2021E 2022E

Total Sales 264.3 440.6 539.5 932.3 1,242.2 1,588.0 1,933.7

Plant #1

Sales 217.4 186.7 115.0 187.3 216.6 223.6 230.3

Price DS 1.81 1.85 2.07 2.13 2.19 2.26 2.33

DP 0.23 0.23 0.26 0.27 0.28 0.29 0.29

Batches DS 125 100 55 85 95 95 95

DP 7 8 16 23 29 31 31

Plant #2

Sales 34.5 253.9 416.5 578.8 727.1 749.5 772.0

Price DS 3.62 3.71 4.14 4.26 4.39 4.52 4.66

DP 0.21 0.21 0.23 0.24 0.25 0.26 0.26

CMP 0.66 0.68 0.76 0.78 0.80 0.83 0.85

Batches DS 10 67 102 132 161 161 161

DP 0 2 4 9 11 13 13

CMP 0 3 8 18 22 22 22

Plant #3

Sales 0.0 0.0 8.0 166.2 298.5 614.9 931.4

Price DS 3.62 3.71 4.14 4.26 4.39 4.52 4.66

DP 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Batches DS 0 0 2 39 68 136 200

DP 0 0 0 0 0 0 0

KRW/USD (end-year) 1,208 1,200 1,300 1,300 1,300 1,300 1,300

KRW/USD (average) 1,155 1,161 1,248 1,248 1,248 1,248 1,248

Note: Based on our forex estimates; assumes per-batch prices rise 3% pa


CMO business: Sales


217.4 186.7 115.0 187.3 216.6 223.6 230.3

Plant #2:34.5 253.9 416.5

578.8 727.1 749.5 772.0

Plant #3:8.0

166.2

298.5 614.9

931.4

0

500

1,000

1,500

2,000

2,500

2016 2017E 2018E 2019E 2020E 2021E 2022E

Plant #1 Plant #2 Plant #3

(KRWb)

Samsung Biologics

2017. 6. 15

127


(KRWb) 2016 2017E 2018E 2019E 2020E 2021E 2022E

Sales 294.6 440.6 539.5 932.3 1,242.2 1,588.0 1,933.7

Chg (% y-y) 49.5 22.5 72.8 33.2 27.8 21.8

Plant #1 217.4 186.7 115.0 187.3 216.6 223.6 230.3

Chg (% y-y) (14.1) (38.4) 62.8 15.6 3.3 3.0

Plant #2 34.5 253.9 416.5 578.8 727.1 749.5 772.0

Chg (% y-y) 635.3 64.0 39.0 25.6 3.1 3.0

Plant #3 8.0 166.2 298.5 614.9 931.4

Chg (% y-y) 1,972.3 79.6 106.0 51.5

Gross profit 26.5 95.8 122.1 389.5 569.3 761.5 938.2

Chg (% y-y) 261.2 27.4 219.0 46.2 33.8 23.2

Gross margin (%) 9.0 21.8 22.6 41.8 45.8 48.0 48.5

Operating profit (30.4) 17.8 40.1 304.2 480.6 645.9 818.6

Chg (% y-y) (158.5) 125.1 659.6 58.0 34.4 26.7

Operating margin (%) (10.3) 4.0 7.4 32.6 38.7 40.7 42.3

Pre-tax profit (230.9) (82.3) 28.9 358.1 646.9 931.7 1,174.5

Chg (% y-y) (64.3) (135.1) 1,138.8 80.6 44.0 26.1

Pre-tax margin (%) (78.4) (18.7) 5.4 38.4 52.1 58.7 60.7

Net profit (176.8) (63.0) 22.1 274.2 495.4 819.9 1,033.6

Chg (% y-y) (64.3) (135.1) 1,138.9 80.6 65.5 26.1

Net margin (%) (60.0) (14.3) 4.1 29.4 39.9 51.6 53.5


Samsung Biologics: Plant utilization rate forecasts


0

20

40

60

80

100

120

2017E 2018E 2019E 2020E 2021E 2022E

Plant #1 Plant #2 Plant #3

(%)

Samsung Biologics

2017. 6. 15

128

Samsung Bioepis: Full-year forecasts

(KRWb) 2017E 2018E 2019E 2020E 2021E 2022E

Sales 149.0 555.1 881.5 1,387.7 1,738.1 2,074.8

Chg (% y-y) 1.0 272.6 58.8 57.4 25.3 19.4

Europe 139.3 372.3 522.9 603.1 748.8 770.6

Chg (% y-y) 63.5 167.2 40.5 15.3 24.2 2.9

Benepali (Enbrel biosimilar) 114.9 276.6 270.9 257.4 257.4 257.4

Chg (% y-y) 34.8 140.8 (2.1) (5.0) 0.0 0.0

Flixabi (Remicade biosimilar) 24.5 52.8 103.4 103.4 103.4 103.4

Chg (% y-y) 115.9 95.9 0.0 0.0 0.0

Lusuduna (Lantus biosimilar) 18.6 36.5 52.0 69.3 86.6

Chg (% y-y) 96.1 42.5 33.3 25.0

SB3 (Herceptin biosimilar) 24.2 47.5 67.7 85.8 101.9

Chg (% y-y) 96.1 42.5 26.7 18.8

SB5 (Humira biosimilar) 64.5 122.6 232.9 221.2

Chg (% y-y) 90.0 90.0 (5.0)

US 182.9 358.6 784.6 989.3 1,304.2

Chg (% y-y) 96.1 118.8 26.1 31.8

Benepali (Enbrel biosimilar) Chg (% y-y)

Flixabi (Remicade biosimilar) 108.2 212.4 403.6 383.4 364.2

Chg (% y-y) 96.4 90.0 (5.0) (5.0)

Lusuduna (Lantus biosimilar) 74.7 146.2 208.3 277.7 347.2

Chg (% y-y) 95.7 42.5 33.3 25.0

SB3(Herceptin biosimilar) 34.1 64.7 92.3

Chg (% y-y) 90.0 42.5

SB5 (Humira biosimilar) 138.7 263.5 500.6

Chg (% y-y) 90.0 90.0

Operating profit (163.6) 54.8 222.8 495.9 672.5 837.4

Chg (% y-y) To remain neg To turn pos 306.6 122.6 35.6 24.5

Operating margin (%) (109.8) 9.9 25.3 35.7 38.7 40.4

Net margin (163.6) 46.6 189.4 421.5 571.6 711.8

Chg (% y-y) To remain neg To turn pos 306.6 122.6 35.6 24.5

Net margin (%) (109.8) 8.4 21.5 30.4 32.9 34.3


Samsung Biologics

2017. 6. 15

129

Samsung Bioepis: Biosimilar sales forecasts


Samsung Bioepis: Biosimilar sales forecasts


0

100

200

300

400

500

600

700

800

2017E 2018E 2019E 2020E 2021E 2022E

Benepali (Enbrel) Flixabi (Remicade) Lusuduna (Lantus)

SB3 (Herceptin) SB5 (Humira)

(KRWb)

114.9 276.6 270.9 257.4 257.4 257.4 Flixabi: 24.5 161.0 315.8 507.0 486.8 467.7 93.3

182.7 260.3 347.0 433.8

SB3: 24.2

SB3: 47.5

101.8 150.5 194.1

SB5: 64.5

261.2

496.3

721.8

0

500

1,000

1,500

2,000

2,500

2017E 2018E 2019E 2020E 2021E 2022E

Benepali (Enbrel) Flixabi (Remicade) Lusuduna (Lantus) SB3 (Herceptin) SB5 (Humira)

(KRWb)

Samsung Biologics

2017. 6. 15

130

Samsung Bioepis: Biosimilar pipeline

Biosimilar in Original drug Patent 2015 Market size Development Note

development (therapeutic area) expiries sales rank (USDb) Phase I Phase III Filed Approval

SB5

(adalimumab)

Humira

(immunologic)

US: 2016

EU: 2018 1 14.4

Europe: Filed

US: Preparing to file SB4

(etanercept)

Enbrel

(immunologic)

US: 2029

EU: 2015 3 9.0

Europe, Korea: Launched

Australia: Approved

Canada: Filed

SB2

(infliximab)

Remicade

(immunologic)

US: 2018

EU: 2015 4 8.2

Europe, Korea: Launched

US, Australia: Approved SB9

(insulin glargine)

Lantus

(metabolic)

US: 2015

EU: 2015 6 7.2

Europe: Approved

US: Filed SB8

(bevacizumab)

Avastin

(oncology)

US: 2019

EU: 2019 7 7.0

Phase III

SB3

(trastuzumab)

Herceptin

(oncology)

US: 2019

EU: 2014 8 6.8

Europe, Korea: filed

US: Preparing to file SAIT101

(rituximab)

Rituxan

(oncology)

US: 2019

EU: 2013 5 7.4

Phase I/III

Note: SB3: Filed for regulatory approval with EMA in Aug 2016

SB5: Filed for regulatory approval with EMA in May 2016

SB4: Received approval from MFDS in Sep 2015 and from EMA in Jan 2016; filed for regulatory approval with Health Canada in May 2015

SB2: Approved by MFDS in Dec 2015, by EMA in May 2016, by Australian TGA in Nov 2016, and by US FDA in Apr 2017

SB9: Filed for regulatory approval with US FDA in May 2016

SAIT101: Co-developing with Archigen Biotech (JV with AstraZeneca)

Source: EvaluatePharma, company data, Samsung Securities

Marketing partners of Samsung Bioepis

Note: * Includes Plegridy sales


Samsung Biologics

2017. 6. 15

131

Europe: Biosimilars of major drugs, by company


Filed

(May 2016) Launched (Aug 2016)

Launched (Feb 2016)

Approved (Jan 2017)

Phase III (Mar 2015)

Filed (Oct 2016)

Pre-clinical

Launched (Feb 2015)

Pre-clinical Pre-clinical Filed

(Nov 2016)

Approved (Feb 2017)

Phase III

(Top-line results released Jan 2017)

Phase III

(Data released Nov 2015)

Filed

(Nov 2016)

Approved

(Mar 2017) Phase III

(Oct 2016)

Filed (Dec 2016)

Phase III (Top-line results

released Jul 2016)

Phase III (May 2016)

Filed

(May 2017) Filed*

(May 2017)

Filed (EMA CHMP

recommendation Apr 2017)

Filed

(Mar 2016)

Filed (EMA CHMP

recommendation

Apr 2017)

Launched (Sep 2015)

Phase III


Filed (Nov 2016)

Phase I Filed

(Aug 2016) Filed

(Jul 2016)

Phase III


Phase III* (Top-line results

released Sep 2016)

Phase III (Feb 2015)


Phase I Phase III

(Sep 2014)

Filed

(Jan 2017)

Launched** (Sep 2015)

Phase III (Jul 2015)


** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar


US: Biosimilars of major drugs, by company


Completed

clinical trials

Approved (Apr 2017)

Completed clinical trials

Filed (May 2016)

Phase III (Mar 2015)


Pre-clinical

Launched (Dec 2016)

Pre-clinical Pre-clinical Completed clinical trials


Phase III


Phase III

(Data released Nov 2015)

Filed

(Aug 2016)

Approved

(Sep 2016) Phase III

(Oct 2016)

Filed (Nov 2016)

Phase III (Top-line results

released Jul 2016)

Phase III (May 2016)

Phase III

(Dec 2013)


released Sep 2016)

Approved (Aug 2016)

Filed**

(Nov 2015) Completed clinical trials

Launched (Dec 2016)

Phase III


Filed (Nov 2016)

Phase I Filed

(Nov 2016)


Phase III



released Sep 2016)



Phase I Phase III

(Sep 2014)

Filed

(Jan 2017)

Launched*** (Dec 2016)

Phase III (Jul 2015)


** US FDA issued Sandoz with a complete response letter for its Neulasta biosimilar in Jul 2016

*** Eli Lilly and Boehringer Ingelheim co-developed Lantus biosimilar


Samsung Biologics

2017. 6. 15

132

Valuations of global peers

(USDm) Samsung Biologics Lonza Celltrion

Country Korea Switzerland Korea

Share price (USD) 187.9 208.2 85.1

Market cap 12,431 15,504 10,434

Sales 2015 81 3,953 533

2016 254 4,196 578

2017E 393 5,002 746

2018E 541 5,887 1,030

Operating profit 2015 (180) 445 229

2016 (26) 493 215

2017E 24 844 404

2018E 111 1,032 599

EBITDA 2015 (143) 757 302

2016E 26 805 292

2017E 93 1,239 480

2018E 184 1,503 676

Net profit 2015 1,698 288 136

2016 (152) 306 153

2017E (28) 612 336

2018E 117 798 490

EPS (USD) 2015 68.7 5.1 1.2

2016 (2.7) 5.4 1.3

2017E (0.4) 9.3 2.8

2018E 1.8 11.0 4.0

P/E (x) 2015 n/a 30.8 60.0

2016 n/a 30.8 70.0

2017E n/a 22.6 30.0

2018E 105.4 19.1 21.1

P/B (x) 2015 n/a 4.0 5.5

2016 2.4 4.0 6.1

2017E 3.5 2.8 4.6

2018E 3.3 2.9 3.9

EV/EBITDA (x) 2015 n/a 14.0 29.7

2016E 324.1 13.7 38.6

2017E 130.6 13.9 22.0

2018E 65.9 11.5 15.6

ROE (%) 2015 112.9 13.0 10.5

2016 (5.2) 13.4 9.5

2017E (0.8) 13.0 16.2

2018E 3.1 13.0 19.7

Note: As of May 29; Samsung Biologics and Celltrion both on parent-basis


Samsung Biologics

2017. 6. 15

133

Income statement


Sales 91 295 441 540 932


Gross profit (24) 27 96 122 389

Gross margin (%) (25.8) 9.0 21.8 22.6 41.8

SG&A expenses 180 57 78 82 85

Operating profit (204) (30) 18 40 304

Operating margin (%) (223.1) (10.3) 4.0 7.4 32.6

Non-operating gains (losses) 2,692 (200) (100) (11) 54


Financial costs 1,841 87 26 27 30

Equity-method gains (losses) 4,524 (129) (102) 3 75

Other 2 1 0 0 0

Pre-tax profit 2,488 (231) (82) 29 358

Taxes 583 (54) (19) 7 84

Effective tax rate (%) 23.4 23.4 23.4 23.4 23.4

Profit from continuing operations 1,905 (177) (63) 22 274


Net profit 1,905 (177) (63) 22 274

Net margin (%) 2,087.0 (60.0) (14.3) 4.1 29.4

Net profit (controlling interests) 1,905 (177) (63) 22 274


EBITDA (162) 30 108 140 400

EBITDA margin (%) (177.5) 10.1 24.4 25.9 43.0

EPS (parent-based) (KRW) 38,489 (3,113) (953) 335 4,145

EPS (consolidated) (KRW) 38,489 (3,113) (953) 335 4,145

Adjusted EPS (KRW)* 38,489 (3,113) (953) 335 4,145

Cash flow statement


Cash flow from operations (266) (63) 57 77 129

Net profit 1,905 (177) (63) 22 274

Non-cash profit and expenses (2,068) 211 171 118 126



Other (2,110) 151 81 18 30

Changes in A/L from operating activities (96) (74) (65) (42) (167)

Cash flow from investments (429) (1,373) (60) (13) 197


Change in financial assets 0 (1,008) 493 247 247

Other (189) (202) 6 0 0

Cash flow from financing 633 1,631 492 800 0

Change in debt 2,057 205 492 800 0

Change in equity 258 1,484 0 0 0

Dividends 0 0 0 0 0

Other (1,682) (58) 0 0 0

Change in cash (62) 196 (108) 323 (198)



Gross cash flow (163) 35 108 140 400

Free cash flow (506) (226) (503) (183) 79



Balance sheet


Current assets 193 1,461 917 1,059 876



Inventories 119 164 212 259 448

Other current assets 4 1,000 507 262 21

Fixed assets 5,768 6,072 7,036 7,740 8,292

Investment assets 4,838 4,966 5,460 6,004 6,602

Tangible assets 890 1,091 1,564 1,727 1,683



Total assets 5,960 7,533 7,953 8,799 9,169

Current liabilities 1,912 2,477 2,994 3,618 3,713



Other current liabilities 1,901 2,475 2,992 3,616 3,710

Long-term liabilities 1,274 974 940 1,140 1,140



Total liabilities 3,186 3,451 3,934 4,758 4,853

Owners of parent equity 2,775 4,082 4,019 4,041 4,316

Capital stock 138 165 165 165 165

Capital surplus 1,031 2,487 2,487 2,487 2,487

Retained earnings 1,602 1,425 1,362 1,384 1,658

Other 5 5 5 5 5


Total equity 2,775 4,082 4,019 4,041 4,316

Net debt 2,478 1,501 2,594 3,318 3,762

Financial ratios

Year-end Dec 31 2015 2016 2017E 2018E 2019E

Growth (%)

Sales 214.6 222.8 49.5 22.5 72.8

Operating profit nm nm nm 125.1 659.6

Net profit nm nm nm nm 1,138.9

Adjusted EPS** nm nm nm nm 1,138.9


EPS (parent-based) 38,489 (3,113) (953) 335 4,145

EPS (consolidated) 38,489 (3,113) (953) 335 4,145

Adjusted EPS** 38,489 (3,113) (953) 335 4,145

BVPS 50,326 61,700 60,747 61,082 65,226

DPS (common) 0 0 0 0 0

Valuations (x)

P/E*** 5.5 n/a n/a 638.2 51.5

P/B*** 4.2 3.5 3.5 3.5 3.3

EV/EBITDA n/a 525.7 155.3 124.8 44.7

Ratios (%)

ROE 107.4 (5.2) (1.6) 0.5 6.6

ROA 52.0 (2.6) (0.8) 0.3 3.1

ROIC (18.8) (2.2) 1.0 1.7 11.9

Payout ratio 0.0 0.0 0.0 0.0 0.0


Net debt to equity 89.3 36.8 64.5 82.1 87.2

Interest coverage (x) (76.8) (1.6) 0.8 1.5 10.3

2017. 6. 15

Hugel (145020)

Earnings to gain visible momentum in 2H

● We expect earnings momentum at Hugel to stay strong into 2018 backed by

growing sales of BTX and filler products.

● The company should emerge as a global medical aesthetics player, given Bain

Capital’s extensive network in the US and Europe. The firm should use Bain’s

injection of KRW454.7b to beef up its US distribution network by securing a new

pharmaceutical maker as a partner and acquiring distributors in key markets. Its

overseas business expansion in 2H deserves attention. ● The stock is now at par with Bain Capital’s per-share purchase price. Considering

the PEF’s expected return, we believe there is ample upside.

WHAT’S THE STORY?

Operating profit to rise 73.3% y-y in 2017: We expect Hugel’s consolidated sales, operating profit, and net profit attributable to controlling shareholders in 2017 to rise 52.7%, 73.3%, and 76.2% y-y to KRW189.7b, KRW109.7b, and KRW76.2b, respectively. Operating leverage should help full-year operating margin rise 6.9%pts to 57.8%. Combined exports of BTX and filler products this year are likely to account for 65.1% of total sales (up 10%pts y-y). The firm’s earnings momentum should stay strong into 2018.

BTX—exports to keep surging: Hugel’s BTX sales should climb 70.7% y-y to KRW109.3b in 2017. In 1Q, Hugel, Medytox, Ipsen, and Allergan’s BTX sales rose a respective 157.6%, 54.2%, 35.8%, and 12% y-y, evidencing still strong global demand. Hugel started recognizing sales to Russia in 1Q and should start doing so for Brazil in 2Q, which is when it should gain approval in Mexico. Penetration into more large emerging markets should sustain solid export growth. As the firm is likely to enter the US, Europe, and China in 2019, its medium- to long-term growth prospects appear strong.

Filler-solid top-line growth to continue: We expect Hugel’s filler sales to expand 40.2% y-y to KRW66.3b in 2017. As proven by 1Q results, concerns over a domestic slowdown of the filler market and tightening Chinese regulations (related to THAAD) on Korean filler products were overblown. We expect the company to win approval for its fillers in 10 more countries in Europe and Asia in 2017, and then in China in 2H18.

Bain Capital to take firm global: Hugel on Apr 17 agreed to grant managerial control to a Bain Capital, a move that we believe eliminates all discounts (such as a managerial dispute, and controversy over a BTX strain). We expect the company to use Bain’s upcoming injection of KRW454.7b to: 1) strengthen its US distribution network by securing a new pharmaceutical maker as a partner, facilitated by Bain’s strong US presence; 2) form subsidiaries and acquire distributors in key markets to help boost ASP; and 3) hike its stake in filler-making subsidiary Across to bolster net margin attributable to controlling shareholders. Shares are trading at an attractive 26.9x fully diluted 2017 EPS. We recommend the stock as our top pick in the medical aesthetics sector.

Company Update


2016 2017E 2018E 2019E

Revenue (KRWb) 124 190 248 305Net profit (adj) (KRWb) 51 87 119 146EPS (adj) (KRW) 13,177 18,931 22,917 28,234EPS (adj) growth (% y-y) 4.4 43.7 21.1 23.2EBITDA margin (%) 54.8 60.4 61.8 61.8ROE (%) 18.8 16.3 14.1 15.1P/E (adj) (x) 34.3 23.9 19.7 16.0P/B (x) 5.8 2.8 2.4 2.1EV/EBITDA (x) 20.6 8.7 6.0 4.3Dividend yield (%) 0.0 0.0 0.0 0.0


Kevin Kim

Analyst


AT A GLANCE




Shares (float) 3,284,058 (73.4%)



KRW20.7b/ USD18.5m


1M 6M 12M

Hugel (%) 7.0 61.1 37.4

Vs Kosdaq (%pts) 5.2 49.1 46.3

KEY CHANGES

(KRW) New Old Diff

Recommend. BUY BUY

Target price 570,000 570,000 0.0%

2017E EPS 18,931 18,927 0.0%

2018E EPS 22,917 22,645 1.2%


No of estimates 6


Recommendation 4.0



May 26

Hugel

2017. 6. 15

135

Results and forecasts (consolidated)

(KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2015 2016 2017E 2018E

Sales 22.7 30.9 32.8 37.8 44.3 48.6 46.3 50.4 65.1 124.2 189.7 247.9

Botulinum toxins 9.8 14.3 19.9 20.0 25.3 27.9 26.9 29.2 30.1 64.0 109.3 145.4

Fillers 9.7 13.1 9.8 14.7 15.5 17.2 15.9 17.7 23.4 47.3 66.3 88.1

Neurological devices 3.1 3.1 3.1 2.9 3.2 3.1 3.1 3.0 9.5 12.2 12.5 12.5

Other (0.0) 0.4 0.0 0.2 0.3 0.4 0.4 0.5 2.1 0.6 1.6 1.9

Gross profit 16.4 23.6 25.3 29.1 34.7 38.2 36.4 39.7 38.5 94.4 149.0 195.9

Operating profit 8.8 16.4 17.9 20.2 25.8 28.6 26.3 28.9 17.8 63.3 109.7 148.2

Pre-tax profit 8.7 17.2 17.7 20.7 25.4 28.3 26.2 28.6 39.3 64.3 108.8 148.5


controlling shareholders 5.5 11.6 12.6 13.6 18.3 19.9 18.3 19.7 33.9 43.3 76.2 104.1

Chg (% y-y) Sales 197.2 84.1 80.7 68.0 95.3 57.3 41.3 33.4 61.3 90.9 52.7 30.7

Botulinum toxins 103.8 78.5 154.0 112.4 157.6 94.9 35.3 45.9 (1.5) 112.8 70.7 33.0

Fillers 321.1 161.6 58.4 48.2 60.0 31.6 62.4 20.1 202.7 101.9 40.2 32.9

Neurological devices n/a 5.1 (3.2) (13.5) 1.6 0.8 0.8 5.1 n/a 28.9 2.0 0.0

Other Turned to neg (48.1) (99.7) Turned to pos Turned to pos (5.4) 12,748.7 164.7 (0.7) (69.6) 150.0 20.0

Gross profit 283.1 147.7 161.7 93.7 111.4 62.2 44.0 36.2 35.6 145.2 57.8 31.5

Operating profit 8,518.2 252.7 317.1 131.5 194.0 74.7 47.0 43.1 14.7 256.2 73.3 35.1

Pre-tax profit 2,664.3 Turned to pos (67.5) 110.8 190.6 64.3 47.8 38.6 151.7 63.7 69.1 36.6


controlling shareholders 2,299.6 Turned to pos (74.4) 98.5 231.9 71.2 45.4 45.3 158.0 27.5 76.2 36.6

Margins (%) Gross profit 72.4 76.2 77.1 77.1 78.3 78.6 78.6 78.7 59.2 76.0 78.6 79.0


Pre-tax profit 38.6 55.7 54.0 54.6 57.4 58.2 56.5 56.8 60.4 51.8 57.4 59.9


controlling shareholders 24.4 37.6 38.3 35.9 41.4 40.9 39.4 39.1 52.1 34.8 40.2


Forward P/E Forward P/B

Source: Quantiwise, Samsung Securities estimates Source: Quantiwise, Samsung Securities estimates

0

100,000

200,000

300,000

400,000

500,000

600,000

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

(KRW)

30x

25x

20x

15x

0

100,000

200,000

300,000

400,000

500,000

600,000

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

(KRW)

3.5x

3.0x

2.5x

2.0x

Hugel

2017. 6. 15

136

Results and forecasts Full-year margins


Note: * Based on net profit attributable to controlling interests


Sales, by product group Sales portion, by product group



Sales breakdown Domestic and export portions of sales

Source: Samsung Securities estimates Source: Samsung Securities estimates

0

50

100

150

200

250

300

0

100

200

300

2015 2016 2017E 2018E

(KRWb)

Sales (LHS)Operating profit (LHS)Net profit (LHS)Sales growth (RHS)Operating profit growth (RHS)

(%y-y)

70.4

59.2

76.0 78.6 79.0

38.4

27.3

50.9 57.8 59.8

32.6

52.1

34.8 40.2 42.0

0

20

40

60

80

100

2014 2015 2016 2017E 2018E

(%)

Gross margin Operating margin

Net margin (excl. MI)

0

50

100

150

200

250

300

2014 2015 2016 2017E 2018E

(KRWb)

BTX Filler Neurological device Other

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017E 2018E

BTX Filler Neurological device Other

0

50

100

150

200

250

300

2014 2015 2016 2017E 2018E

(KRWb)

Exports

Domesticsales

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017E 2018E

Exports

Domesticsales

Hugel

2017. 6. 15

137

Shareholder breakdown (before deal with Bain Capital) Shareholder breakdown (after deal with Bain Capital)

Source: DART Source: DART

Hugel: Ownership structure


Dongyang HC 24.4%

B.K. Kim 8.4%

Morgan Stanley

Investment Mgmt 7.2%Foreign

investors 16.8%

ESOP 0.8%

Other 42.5%

Bain Capital 45.3%

B.K. Kim 6.0%

Morgan Stanley

Investment 5.2%

ESOP 0.6%Other42.9%

45.3%

HugelPharma

HugelMeditech

AB Bio Across Enjiness OlixSmall Lab

100% 100% 60.0% 52.2% 29.0% 15.2%8.4%

Wei Hai Hugel

Pharma

HugelPharma (Vietnam)

100% 100%

Bain Capital

Hugel

Hugel

2017. 6. 15

138

Global medical aesthetic players: Peer valuations

(KRWb, USDm)

Hugel Medytox Daewoong

Pharm

Huons Caregen Pharma

Research

Humedix Bloomage

BioTech

Shanhai

Haohai

Allergan Ipsen Revance

Nation Korea Korea Korea Korea Korea Korea Korea China China US France US

Main products BTX, HA BTX, HA BTX, HA BTX HA PDRN HA HA HA BTX, HA BTX BTX

Share price (KRW, USD) 451,900 506,800 93,100 55,200 71,300 40,650 32,350 1.67 5.63 223.12 123.51 21.95

Market cap 1,484 2,867 1,079 342 764 385 288 608 901 74,939 10,323 665

Sales 2016 124.2 133.3 883.9 169.0 46.8 46.0 47.1 127.2 128.2 14,571 1,850 0

2017E 189.7 183.7 916.2 270.8 57.2 57.0 50.0 149.5 197.4 15,813 2,133 0

2018E 247.9 231.6 1,003.8 297.7 67.5 n/a 54.6 183.9 237.7 16,941 2,458 0

Operating profit 2016 63.3 75.2 25.9 21.5 25.7 14.1 12.8 44.5 45.9 579 412 (77)

2017E 109.7 100.2 40.9 31.6 32.7 21.0 12.8 55.8 53.0 7,638 524 (111)

2018E 148.2 127.3 47.7 35.5 40.3 n/a 14.8 65.7 64.5 8,318 656 (111)

EBITDA 2016 68.1 79.9 57.5 24.6 28.3 16.0 13.8 53.5 38.0 4,806 381 (87)

2017E 114.5 105.7 78.2 39.2 35.1 22.0 18.4 63.6 70.2 7,844 586 n/a

2018E 153.2 133.0 90.0 42.5 43.0 n/a 20.3 73.0 85.2 8,451 721 n/a

Net profit attributable 2016 43.3 59.2 27.0 15.3 23.0 13.9 10.3 34.3 45.9 5,502 291 (83)

to controlling shareholders 2017E 76.2 79.7 40.7 25.8 24.7 18.9 9.8 42.2 54.5 5,727 369 (112)

2018E 104.1 101.0 49.0 29.0 31.2 n/a 12.1 51.1 65.1 6,370 452 (111)

EPS (KRW, USD) 2016 13,177 10,471 2,328 2,498 214 1,469 1,152 0.09 0.29 13.51 3.52 (2.97)

2017E 18,931 14,083 3,508 4,168 231 1,997 1,099 0.11 0.34 16.11 4.50 (3.79)

2018E 22,917 17,848 4,229 4,677 291 n/a 1,357 0.13 0.41 17.98 5.70 (3.58)

Sales 2017E 52.7 37.8 3.7 60.3 22.1 24.0 6.1 17.6 54.0 8.5 15.3 n/a

chg (% y-y) 2018E 30.7 26.1 9.6 9.9 18.0 n/a 9.2 23.0 20.4 7.1 15.3 n/a

Operating profit 2017E 73.4 33.3 58.1 46.8 27.3 48.9 (0.3) 25.6 15.4 1,219.2 27.4 n/a

chg (% y-y) 2018E 35.1 27.1 16.5 12.2 23.2 n/a 15.6 17.7 21.9 8.9 25.2 n/a

Net profit attributable 2017E 76.2 34.5 50.7 68.3 7.6 35.9 (4.6) 22.8 18.7 4.1 26.7 n/a

to controlling shareholders 2018E 36.6 26.7 20.5 12.2 26.3 n/a 23.5 21.2 19.4 11.2 22.6 n/a

Operating margin (%) 2017E 57.8 54.5 4.5 11.7 57.2 36.8 25.6 37.3 26.8 48.3 24.6 n/a

2018E 59.8 55.0 4.7 11.9 59.7 n/a 27.1 35.7 27.1 49.1 26.7 n/a

Net margin attributable to 2017E 40.2 43.4 4.4 9.5 43.2 33.2 19.6 28.2 27.6 36.2 17.3 n/a

controlling shareholders (%) 2018E 42.0 43.6 4.9 9.7 46.2 n/a 22.2 27.8 27.4 37.6 18.4 n/a

P/E (x) 2016 24.4 34.1 29.5 25.6 38.3 27.5 29.1 18.2 20.2 3,719.5 40.3 n/a

2017E 23.9 36.0 26.5 13.2 30.9 20.4 29.4 15.3 16.5 13.9 27.6 n/a

2018E 19.7 28.4 22.0 11.8 24.5 n/a 23.8 12.6 13.8 12.4 21.8 n/a

P/B (x) 2016 4.2 12.8 1.4 4.2 3.6 2.2 2.7 2.7 2.1 1.1 6.7 3.7

2017E 2.8 12.4 1.8 2.8 2.9 2.0 2.3 2.4 2.2 1.1 5.9 n/a

2018E 2.4 8.7 1.7 2.3 2.7 n/a 2.2 2.0 2.0 1.2 5.0 n/a

EV/EBITDA (x) 2016 14.0 26.0 18.0 16.9 24.8 17.0 18.1 11.0 n/a 25.6 16.2 n/a

2017E 8.7 27.4 17.4 8.3 17.9 11.5 13.9 8.3 10.0 13.2 17.8 n/a

2018E 6.0 21.1 15.1 7.0 14.4 n/a 12.4 6.4 7.7 12.0 14.2 n/a

ROE (%) 2016 18.8 45.4 4.4 n/a n/a n/a n/a 16.6 11.0 7.7 19.3 (46.5)

2017E 16.3 43.7 6.6 23.9 10.2 10.5 8.4 17.4 13.1 2.9 20.9 n/a

2018E 14.1 38.5 7.8 21.5 12.0 n/a 9.8 17.4 15.0 5.0 22.2 n/a

Return (%) 1-month 7.0 1.8 3.1 2.2 0.4 12.8 0.0 (1.5) 2.2 (8.5) 3.4 0.9

3-months 29.9 21.3 9.9 15.0 1.9 10.5 4.9 15.2 18.4 (8.9) 31.8 4.5

6-months 61.1 51.2 35.1 1.3 7.7 1.6 4.9 7.6 17.9 17.4 75.4 24.7

12-months 37.4 13.6 (5.0) 0.0 (38.9) (26.4) (32.9) (9.3) 13.9 (5.4) 92.4 10.7

Ytd 40.7 42.1 35.5 (13.5) (13.2) 0.6 (3.6) 11.3 15.7 6.2 60.8 6.0

Note: Based on May 26 closing prices and forex rates; Hugel/Medytox based on our forecasts, other Korean firms on QuantiWise, overseas firms on Bloomberg

Source: QuantiWise, Bloomberg, Samsung Securities

Hugel

2017. 6. 15

139

Income statement


Sales 65 124 190 248 305


Gross profit 39 94 149 196 242

Gross margin (%) 59.2 76.0 78.6 79.0 79.5

SG&A expenses 21 31 39 48 59



Non-operating gains (losses) 22 1 (1) 0 (0)



Equity-method gains (losses) 2 (1) (1) (1) (1)

Other 19 1 (0) (0) (0)

Pre-tax profit 39 64 109 149 183

Taxes 3 13 22 30 37




Net profit 36 51 87 119 146

Net margin (%) 55.1 41.0 45.9 47.9 48.0



EBITDA 19 68 115 153 189

EBITDA margin (%) 29.7 54.8 60.4 61.8 61.8



Adjusted EPS (KRW)* 12,620 13,177 18,931 22,917 28,234

Cash flow statement



Net profit 36 51 87 119 146

Non-cash profit and expenses (15) 20 27 34 42



Other (17) 16 22 29 37

Changes in A/L from operating activities 2 (24) (14) (12) (12)

Cash flow from investments (17) (54) (14) (14) (17)


Change in financial assets 4 (38) (7) (7) (7)

Other (9) (0) (0) 0 0

Cash flow from financing 50 3 455 0 0

Change in debt (45) (1) 100 0 0

Change in equity 131 4 355 0 0

Dividends 0 0 0 0 0

Other (35) 0 0 0 0

Change in cash 53 (6) 516 95 120



Gross cash flow 20 71 114 153 189

Free cash flow 7 30 72 105 130

Note: * Excluding one off items ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation


Balance sheet


Current assets 107 151 685 801 943



Inventories 8 14 18 24 29


Fixed assets 126 143 154 164 176





Total assets 234 294 839 965 1,119













Other 2 (0) (0) (0) (0)


Total equity 215 274 716 834 981

Net debt (76) (104) (521) (618) (739)

Financial ratios

Year-end Dec 31 2015 2016 2017E 2018E 2019E

Growth (%)

Sales 61.3 90.9 52.7 30.7 23.1

Operating profit 14.7 256.2 73.4 35.1 23.6

Net profit 172.7 42.0 71.0 36.6 23.2

Adjusted EPS** 138.4 4.4 43.7 21.1 23.2


EPS (parent-based) 12,620 13,177 18,931 22,917 28,234


Adjusted EPS** 12,620 13,177 18,931 22,917 28,234

BVPS 63,290 77,438 160,883 185,379 215,558

DPS (common) 0 0 0 0 0

Valuations (x)

P/E*** 35.8 34.3 23.9 19.7 16.0

P/B*** 7.1 5.8 2.8 2.4 2.1

EV/EBITDA 73.3 20.6 8.7 6.0 4.3

Ratios (%)

ROE 27.1 18.8 16.3 14.1 15.1

ROA 21.7 19.3 15.4 13.2 14.1

ROIC 18.5 35.9 55.1 67.8 76.7

Payout ratio 0.0 0.0 0.0 0.0 0.0


Net debt to equity (35.5) (37.9) (72.8) (74.0) (75.4)

Interest coverage (x) 520.8 n/a n/a n/a n/a

2017. 6. 15

Dentium (145720)

Discount unwarranted

● Our forecasts show Dentium’s full-year sales and operating profit up a respective

23.7% and 27.2%, with it retaining significant growth potential.

● Shares in the firm trade at 16.1x 2017 P/E, which is a 37.4% discount to the 25.7x

average of Korean rivals Osstem Implant (26x) and Dio (25.4x), while its solid cash

flow increases the likelihood of treasury share cancelation. Given such positives,

we initiate coverage on the stock at BUY with a 12-month target price of

KRW50,000 and make it our medical device sector top pick.

WHAT’S THE STORY?

No. 2 domestic dental implant player: Dentium is Korea’s number-two dental

implant player with a market share of 15% in 2015, while competitive pricing have helped

it to gain presence elsewhere in Asia. The firm’s export portion of total sales rose by

3.9%pts to 59.3% in 2016, with most bound for China (27.9%), the UAE (10.6%), and

Russia (6.8%).

Attractive product mix: Dentium’s profitability edge over rivals owes to in-house

developed products accounting for over 90% of total sales, while its 1Q gross margin of

73.8% outpaced Dio (72.8%) and Osstem Implant (60.3%). The firm plans to internalize

digital dentistry device production (as it does for implants and bone graft materials), and

recently won domestic approval for cone beam computed tomography devices (CBCTs),

with an advanced 3D intraoral scanner set to debut next year.

China operation: Dentium entered China in 2009, last year becoming that nation’s

number-three player with sales growth of 37.3% to KRW33.5b. The firm established a

local dental subsidiary in 2015, which should commence annual production of 300,000

units from 2H18 and thus help mitigate risk related to protectionist measures undertaken

by that government against foreign firms. Expectations of such localization efforts paying

off still seem valid, with Dentium set to be the only foreign player with local production.

The firm’s China-bound exports were sluggish in 1Q, but they are likely normalizing this

quarter. (Continued on the next page)

*This report originally published on Jun 2

Company Initiation


2016 2017E 2018E 2019E

Revenue (KRWb) 120 148 178 206


EPS (adj) (KRW) 1,788 2,329 2,899 3,561

EPS (adj) growth (% y-y) 36.7 30.3 24.5 22.9

EBITDA margin (%) 27.1 27.1 27.0 27.9

ROE (%) 33.7 21.1 16.8 17.4

P/E (adj) (x) 20.9 16.1 12.9 10.5

P/B (x) 6.0 1.8 1.6 1.3

EV/EBITDA (x) 14.8 10.9 9.7 7.5

Dividend yield (%) 0.3 0.3 0.3 0.3


Kevin Kim

Analyst


AT A GLANCE



Market cap KRW438.33b/USD390.67m

Shares (float) 11,068,830 (54.7%)



KRW6.7b/ USD6.0m


1M 6M 12M

DENTIUM (%) 3.0 n/a n/a

Vs Kospi (%pts) -3.1 n/a n/a

KEY CHANGES

(KRW) New Old Diff

Recommend. BUY Not Rated

Target price 50,000 n/a n/a

2017E EPS 2,329 n/a n/a

2018E EPS 2,899 n/a n/a


No of estimates 3

Target price 45,667

Recommendation 3.7


Dentium

2017. 6. 15

141

Full-year sales set to rise 23.7%: Our forecasts have the full-year sales of Dentium up 23.7%,

backed by implant market growth in Asia, and despite SG&A cost hikes (eg, labor and R&D), we

foresee its operating profit and margin rising a respective 27.2% and 0.6%pts to 27.2% and 24.4%.

Unlike rivals, the firm has no plans to hire significant numbers of new staff, so near-term earnings

improvements warrant attention.

Undervalued: Shares in Dentium trade at 16.1x 2017 P/E, which is a 37.4% discount to the 25.7x

average of Korean rivals Osstem Implant (26x) and Dio (25.4x), and if treasury shares (22.1% of

those outstanding) were excluded, its P/E multiple would be just 12.5x P/E. The company’s solid

cash flow increases the likelihood of it cancelling treasury shares, and while its foreign ownership is

just 2% (vs 48% for Osstem and 21% for Dio), this should rise once its earnings visibility improves.

Initiating coverage at BUY with KRW50,000 target: We initiate coverage of Dentium at

BUY with a 12-month target price of KRW50,000, which: 1) offers 33.5% upside from current levels

and 2) is derived by applying 21.4x P/E—a 20% discount to the average of medical device players

Osstem Implant, Dio, Straumann, Danaher, Dentsply Sirona, Zimmer Biomet, Henry Schein, and

Align Technology—to its projected 2017 net profit attributable to controlling interests of KRW25.8b.

We apply the discount since the firm: 1) lacks earnings visibility by being newly-listed; 2) has a high

China portion of sales at 27.9% while THAAD uncertainties still linger; and 3) has insignificant

export sales to developed markets such as the US and Europe. Our target P/E seems fairly

conservative given that the company’s domestic rivals trade an average P/E of 25.7x.

Valuation

(KRWb) 2017E net profit P/E (x) Note

Operating value 552.7 25.8 21.4 20% discount to global dental device players* (26.8x 2017 P/E)

Fair equity value 552.7 Number of common shares (‘000) 11,069 Target price (KRW) 49,930 Note: * Osstem Implant, Dio, Straumann, Danaher, Dentsply Sirona, Zimmer Biomet, Henry Schein, and Align Technology


Dentium

2017. 6. 15

142

Reasons why we recommend Dentium

More attractively valued than rivals: Leading global dental implant player Straumann trades

at 36.5x P/E, while our estimates show Dentium trades at 16.1x 2017 P/E (and just 12.5x if excluding

treasury shares), which is a significant undervaluation, even though its business model is comparable

to those of rivals. In addition, the company accounted for 15% of Korea’s dental implant market in

2015, trailing only Osstem Implant, with it is also being China’s third-largest player, where it enjoys

significant brand power. The firm’s PEG multiple of 0.59x—based on projected growth in average net

profit attributable to controlling interests over 2016-2018—lags the respective figures of 0.86x and

1.74x for Osstem Implant and Dio, but given its solid earnings outlook, we expect the valuation figure

to soon catch up.

Global dental device players: P/E vs EPS growth

Source: Bloomberg, Samsung Securities estimates

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30 35

2017E P/E (x)

2016-2018E avg EPS growth (%)

Patterson

Henry Schein

Straumann

Danaher Lifco

Align Tech

Dentium

Coltene

Osstem Implant

Dentsply Sirona

Dio

Dentium

2017. 6. 15

143

Treasury share cancellation likely: Dentium’s 2,444,939 treasury shares represent 22.1% of

those outstanding, which it might utilize to boost the holdings of majority stakeholders (currently at

19.1%) or to bolster the share price, but given its solid cash flow, we see little chance of them being

sold. The company needs KRW106.5b (KRW56b this year and KRW50.5b in 2018) to construct a

new HQ, which it plans to finance with KRW26.4b of IPO proceeds and cash of KRW23.4b this year

and KRW34.3b in 2018, with the remainder to made up with borrowings. The firm’s solid

financials—as evidenced by a current ratio of 133%, debt ratio of 76.7%, and net cash position of

KRW3.5b—means cancellation of the treasury shares is probable.

Ownership breakdown Lock-up periods

Shareholder Shares Stake (%) Lock-up

Major stakeholders, et al. 2,116,490 19.1 6 months

Treasury 2,444,939 22.1 6 months

E&GENNAKER Fund No.1 407,000 3.7 6 months

ESOP 509,166 4.6 12 months

Total 5,477,595 49.5

Note: 142,000 of 2,545,831 shares offered to institutional investors were

under lockup from its Mar 15 listing, with 25,000 having been so for 15

days while another 117,000 are still under a three-month lockup



Expected use of IPO proceeds (announced in March)

(KRWb) Proceeds

Pay taxes related to gains from disposing of treasury shares 14.9

Inject cash into overseas subsidiaries 9.5

Repay part of KRW54.5b debt 27.7

Finance part of KRW106.5b to construct new HQ 26.4


Foreign ownership set to rise: Foreign shareholders control just 2.1% of Dentium (vs 48.3% for

Osstem and 20.6% for Dio), which we attribute to its poor earnings visibility as a newly-listed firm

and a pre-IPO accounting fraud issue. The company’s modified sales and operating profit met 1Q

consensus estimates, with its earnings likely remaining solid this quarter, and once related visibility

improves, foreign investors in tune with Korea’s competitive implant industry should flock to the

stock.

Major shareholder et al: 19.1%

E&GENNAKER Fund:

3.7%

ESOP: 4.6%

Treasury stock: 22.1%

Other: 50.5%

Total number of shares :

11,068,830

Dentium

2017. 6. 15

144

Gross margin to stay over 70% on premium-heavy product mix: Dentium enjoys an edge

in profitability over rivals as its in-house developed products account for over 90% of total sales.

Indeed, the company’s gross margin hit 73.8% in 1Q (vs 72.8% at Dio and 60.3% at Osstem Implant),

with it also striving to internalize digital dentistry device production, which would follow up on

implants and bone graft materials. Notably, the firm commercialized CAD/CAM devices in 2015,

launched cone beam computed tomography devices (CBCTs) in 2Q17, and plans to roll out an

advanced 3D intraoral scanner (which is critical to digital implants) in 2018. Dentium is Korea’s most

advanced digital dentistry hardware player, while 59%-owned bone graft materials subsidiary Genoss

commands 40% of the domestic market, which should grow in tandem with the implant industry.

Dental implant players: Development and securing of product portfolios

Product Dentium Osstem Implant Dio Straumann

Cate

go

ry

Implant Implants In-house In-house In-house In-house

Surgery kit In-house In-house In-house In-house

Digital

dentistr

y

CAD/CAM In-house Under development Merchandise Secured by M&A

IOS Under development Under development Merchandise Secured by M&A

CBCT In-house Under development Merchandise Secured by M&A

Other

Crown In-house Merchandise Merchandise Secured by M&A

Bone materials In-house* Merchandise Merchandise Secured by M&A

Chairs n/a In-house n/a Secured by M&A

Note: * Bone materials produced by Genoss


Top-line growth to be led by Asian implant demand, insurance coverage at home: We

expect Dentium’s sales to rise a respective 23.7% and 19.6% this year and in 2018, backed by implant

market growth in Asia, with the domestic figures projected to rise 22.5% and 13.5%, respectively, to

KRW59.9b and KRW67.9b. Our forecasts for the latter could soon be revised up since Korea’s new

president supported expanded health insurance coverage while campaigning.

China operation: China’s dental implant market is expected to grow at a CAGR of 19.9% over

2015-2023, with Dentium first entering that nation in 2009 before becoming its number-three player

in 2016 with full-year sales growth of 37.3% to KRW33.5b. The firm established a local subsidiary in

2015, with annual capacity of 300,000 units expected to commence from 2H18—nb, China takes

two-three years before approving manufacturing once medical device production facilities are

constructed—which should: 1) mitigate risk related to regulations aimed at overseas firms; and 2)

make it the only foreign medical device player with local production. Dentium’s China-bound exports

were sluggish in 1Q, but they are likely normalizing this quarter, although our forecasts have its sales

there rising just 12.8% to KRW37.8b this year.

Cost controls to drive earnings growth: We expect Dentium’s full-year operating profit and

margin to rise a respective 27.2% and 0.6%pts to 27.2% and 24.4%, despite SG&A cost hikes, which

should owe to solid top-line growth. Unlike domestic rivals, the company will not add much staff this

year, with a plan to hire just 50 personnel for a total of 660, which should boost earnings growth.

Dentium

2017. 6. 15

145

Results and forecasts (consolidated)

(KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2015 2016 2017E 2018E

Sales 25.8 30.6 31.2 32.5 32.0 37.6 37.9 41.0 95.5 120.0 148.5 177.5

Domestic 11.3 12.7 12.9 11.9 14.3 15.4 14.5 15.7 42.5 48.8 59.9 67.9

Overseas 14.5 17.9 18.3 20.5 17.7 22.2 23.4 25.3 52.9 71.2 88.6 109.6

China 7.1 8.2 8.2 10.0 7.5 9.4 9.9 11.0 24.4 33.5 37.8 45.4

Russia 1.8 2.4 2.0 1.9 0.5 2.2 2.2 2.2 6.1 8.1 7.1 9.2

UAE 2.0 3.2 3.6 3.9 3.4 4.1 4.7 5.1 4.9 12.8 17.4 20.9

Other 3.7 4.1 4.4 4.7 6.2 6.5 6.6 7.0 17.6 16.8 26.3 34.2

Gross profit 19.9 21.7 22.8 18.9 23.6 27.1 27.3 27.6 68.7 83.3 105.7 126.4


Pre-tax profit 7.5 6.0 8.1 4.8 5.3 8.7 9.3 11.1 17.4 26.4 34.4 42.8

Net profit* 5.5 4.6 7.1 2.7 3.7 6.5 7.0 8.6 14.5 19.8 25.8 32.1

Growth (% y-y)

Sales 17.6 29.0 28.2 27.3 23.8 22.9 21.6 26.4 11.3 25.7 23.7 19.6

Domestic 3.6 16.4 27.5 12.6 26.9 20.7 12.2 31.5 16.4 14.8 22.5 13.5

Overseas 31.3 39.8 28.6 37.8 21.4 24.5 28.2 23.4 7.6 34.5 24.5 23.7

China 102.7 56.3 11.9 20.4 6.1 15.0 20.0 10.0 90.0 37.3 12.8 20.0

Russia (26.2) 17.5 65.3 426.0 (70.5) (10.0) 10.0 15.0 (35.3) 34.1 (12.6) 28.8

UAE 148.8 210.9 110.4 203.1 70.9 30.0 30.0 30.0 (37.5) 162.6 36.5 20.0

Other (15.7) (8.8) 12.6 (5.0) 68.8 60.0 50.0 50.0 (8.3) (4.7) 56.5 30.0

Gross profit 9.7 26.9 31.7 16.8 18.9 24.9 19.6 46.4 13.8 21.2 26.9 19.6

Operating profit 38.3 (5.5) 556.4 40.4 4.5 43.9 (5.7) 143.8 (0.7) 70.1 27.2 21.2

Pre-tax profit 33.8 (10.6) 158.5 145.2 (29.1) 43.4 15.9 130.4 (4.4) 51.4 30.3 24.5

Net profit* 9.2 (14.7) 228.9 37.7 (31.6) 41.1 (0.8) 219.7 (3.4) 36.7 30.3 24.5

Margin (%)

Gross profit 76.9 71.0 73.2 58.1 73.8 72.2 72.0 67.4 72.0 69.4 71.2 71.2


Pre-tax profit 29.0 19.7 25.8 14.8 16.6 23.0 24.6 27.0 18.2 22.0 23.1 24.1

Net profit* 21.1 15.0 22.7 8.2 11.7 17.3 18.5 20.9 15.2 16.5 17.4 18.1

Note: * Net profit attributable to controlling interests


Overseas subsidiary earnings overview (2016)

(KRWb) Sales Operating profit Net Change (% y-y)

profit Sales Operating profit Net profit

China (five subsidiaries) 33.6 (0.6) (1.2) 25.7 Remained neg Remained neg

Russia 0.0 (0.0) (0.0) n/a Remained neg Remained neg

UAE 12.8 1.1 1.0 142.4 613.0 617.9

US (two subsidiaries) 1.4 0.4 0.1 -72.1 Turned pos Turned pos

Europe 2.2 0.2 0.2 85.9 Turned pos Turned pos

Thailand 1.5 (0.4) (0.4) 124.0 Remained neg Remained neg

Singapore 1.1 (0.3) (0.4) -5.6 Remained neg Remained neg

Hong Kong 0.9 (0.1) (0.1) -0.5 Remained neg Remained neg

Malaysia 0.5 (0.2) (0.2) 462.2 Remained neg Remained neg

India 0.4 (0.5) (0.5) n/a Remained neg Remained neg

Indonesia 0.0 (0.0) (0.0) n/a n/a n/a

Total 54.3 (0.4) (1.5) 33.0 Remained neg Remained neg


Dentium

2017. 6. 15

146

Results and forecasts Sales portions, by product



Total sales China sales



Sales, by country Sales portions, by country

Source: Company data Source: Company data

89

65

3

20

8 15

0%

20%

40%

60%

80%

100%

2016 2020E

Implants Digital dentistry devices Other

95.5 120.0

148.5

177.5

16.8 28.5 36.3 44.0

14.5 19.8 25.8 32.1

(20)

0

20

40

60

80

0

30

60

90

120

150

180

2015 2016 2017E 2018E

(% y-y)(KRWb)

Sales (LHS)


Net profit (LHS)

Sales growth (RHS)

Operating profit growth (RHS)

73.9 85.8

95.5

120.0

148.5

177.5

0

20

40

60

80

100

120

140

160

180

200

2013 2014 2015 2016 2017E 2018E

(KRWb)

8.9 12.8

24.4

33.5

37.8

45.4

0

5

10

15

20

25

30

35

40

45

50

2013 2014 2015 2016 2017E 2018E

(KRWb)

43 45 41 40 38

15 26 28 25 26

11

6 7 5 5

9 5 11

12 12

22 18 14 18 19

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017E 2018E

Korea China Russia UAE Other

0

20

40

60

80

100

120

140

160

180

2014 2015 2016 2017E 2018E

(KRWb)

Korea China Russia UAE Other

Dentium

2017. 6. 15

147

Global: Dental implant market size and growth Dental implant market breakdown, by region

Source: MRG, Osstem Implant


Dental implant market growth, by region Dental implant market overview, by sales volume

< 0.25m units 0.25 - 1m units > 1m units

Switzerland

Austria

Sweden

Netherlands

Canada

Australia

India

Colombia

Mexico

Japan

Spain

China

France

Russia

Israel

Turkey

Argentina

UK

US

Brazil

Korea

Germany

Italy

Source: Straumann

Note: 2015-2023E CAGR


Global: Dental implant market share Korea: Dental implant market share

Source: Straumann Source: MRG, DART, Samsung Securities estimates

19.5

10.2 10.2 8.6

4.4

0

5

10

15

20

25

China Asia(ex China)

NorthAmerica

LatinAmerica

Europe

(%)

3.7 4.0 4.2

4.6 4.9 5.4 5.8

6.4 7.0

0

2

4

6

8

10

12

0

1

2

3

4

5

6

7

8

2015 2017E 2019E 2021E 2023E

(% y-y)(USDb)

Global dental implant market (LHS)

Market growth (RHS)

2016~2023E CAGR 8.2%

36 42

36 27

20 23

7 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2023E

North America Europe Asia Latin America

Straumann: 22%

Danaher: 19%

Dentsply Sirona: 12%

Zimmer Biomet:11%

Henry Schein:

5%

Other:31%

Osstem Implant:

33%

Dentium:15%Neo

Biotech:15%

Dio:9%

Megagen Implant:

7%

Other:21%

Dentium

2017. 6. 15

148

North America: Dental implant market size Europe: Dental implant market

Source: MRG, Company data


Asia: Dental implant market Latin America: Dental implant market

Source: MRG, Company data Source: MRG, Company data

Estimated number of implants per 10,000 inhabitants, by nation (2015)

Source: Straumann

1,365

2,959

0

2

4

6

8

10

12

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2017E 2019E 2021E 2023E

(% y-y)(USDm)

Dental implant market (LHS)

Market growth (RHS)

1,364

1,931

0

1

2

3

4

5

6

7

0

500

1,000

1,500

2,000

2,500

2015 2017E 2019E 2021E 2023E

(% y-y)(USDm)


Market growth (RHS)

746

1,624

0

2

4

6

8

10

12

14

16

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2015 2017E 2019E 2021E 2023E

(% y-y)(USDm)


Market growth (RHS)

268

514

012345678910

0

100

200

300

400

500

600

2015 2017E 2019E 2021E 2023E

(% y-y)(USDm)


Market growth (RHS)

Dentium

2017. 6. 15

149

China: Dental implant market China: Dental implant market share



Growth in number of dentists, by country China: Growth in number of implant-qualified dentists

Note: 2011-2014 CAGR

Source: OECD

Source: KOTRA

Dentist population characteristics, by country Implant-qualified portion of dentists, by region

Source: Straumann Source: Osstem Implant

Osstem Implant:

36%

Straumann: 30%

Dentium: 18%

Other: 16%

1,365

2,959

0

2

4

6

8

10

12

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2017E 2019E 2021E 2023E

(%)(USDm)


Market growth (RHS)

0123456789

10

Chin

a

Hu

ngary

Me

xico

Au

stra

lia

Luxem

bourg

Isra

el

Kore

a

Slo

venia

Czech

Ge

rmany

Be

lgiu

m

UK

US

Au

stria

Sw

itzerlan

d

Fra

nce

Japa

n

Norw

ay

Po

lan

d

(%)

1%

11%

2008 2015

80

22

11

0

20

40

60

80

100

Korea North America China

(%)

Dentium

2017. 6. 15

150

Dental device makers: Peer valuations

(KRWb, USDm)

Dentium Osstem

Implant

Dio Straumann Danaher Dentsply

Sirona

Zimmer

Biomet

Henry

Schein

Align

Tech

Coltene Lifco Patterson

Headquarters Korea Korea Korea Switzerland US US US US US Switzerland Sweden US

Focus Implants Implants Implants Implants Total

solutions

Total

solutions Implants Distributor

Ortho-

dontics

Consum-

ables Distributor Distributor

Share price (KRW, USD) 37,450 52,200 34,700 552.55 84.40 62.72 119.23 182.68 142.10 99.74 28.40 43.94

Market cap 415 746 526 8,774 58,584 14,377 24,042 14,492 11,415 421 2,580 4,268

Sales 2016 120.0 344.6 88.4 932 16,882 3,745 7,684 11,572 1,080 163 1,051 5,593

2017E 148.5 409.3 104.0 1,082 17,949 4,010 7,865 12,230 1,354 163 1,124 5,731

2018E 177.5 468.1 126.3 1,190 18,742 4,203 8,114 12,895 1,613 169 1,175 5,951

Operating profit 2016 28.5 34.2 25.9 231 2,751 455 826 772 249 24 146 288

2017E 36.3 44.1 30.5 276 3,249 850 2,463 864 309 24 162 370

2018E 44.0 57.9 34.8 311 3,570 945 2,673 940 392 26 173 394

EBITDA 2016 32.5 41.1 28.7 263 3,879 726 1,865 941 273 29 173 372

2017E 40.3 50.7 33.7 321 4,196 974 3,117 1,044 340 29 190 428

2018E 47.9 64.4 38.0 360 4,547 1,067 3,299 1,134 427 31 201 451

Net profit (excl. MI) 2016 19.8 23.5 19.8 233 2,554 430 306 507 190 18 106 171

2017E 25.8 28.7 20.7 236 2,774 659 1,739 578 265 18 128 217

2018E 32.1 39.9 26.0 270 2,909 733 1,890 631 313 19 136 231

EPS 2016 1,788 1,645 1,304 14.91 3.69 1.97 1.53 6.27 2.38 4.16 1.17 1.80

(KRW, USD) 2017E 2,329 2,009 1,366 15.16 3.93 2.84 8.54 7.27 3.24 4.37 1.33 2.32

2018E 2,899 2,791 1,711 17.33 4.29 3.20 9.30 8.04 3.85 4.61 1.40 2.53

Chg (% y-y)

Sales 2017E 23.7 18.8 17.7 16.1 6.3 7.1 2.4 5.7 25.4 (0.2) 6.9 2.5

2018E 19.6 14.4 21.4 9.9 4.4 4.8 3.2 5.4 19.1 3.6 4.5 3.8

Operating profit 2017E 27.2 28.7 17.8 19.5 18.1 87.0 198.2 11.9 24.3 1.3 10.5 28.4

2018E 21.2 31.3 14.1 12.7 9.9 11.1 8.5 8.9 26.6 6.6 6.7 6.6

Net profit (excl. MI) 2017E 30.3 22.1 4.8 1.0 8.6 53.3 468.5 14.0 39.5 1.7 20.2 27.0

2018E 24.5 38.9 25.3 14.5 4.9 11.3 8.7 9.2 18.5 8.3 6.2 6.4

Margins (%)

Operating margin 2017E 24.4 10.8 29.3 25.5 18.1 21.2 31.3 7.1 22.9 14.7 14.4 6.5

2018E 24.8 12.4 27.5 26.1 19.0 22.5 32.9 7.3 24.3 15.1 14.7 6.6

Net margin (excl. MI) 2017E 17.4 7.0 19.9 21.8 15.5 16.4 22.1 4.7 19.5 10.9 11.4 3.8

2018E 18.1 8.5 20.6 22.7 15.5 17.4 23.3 4.9 19.4 11.4 11.5 3.9

P/E (x) 2016 n/a 36.9 29.3 36.7 23.9 30.5 24.4 26.4 52.8 23.7 24.7 21.0

2017E 16.1 26.0 25.4 36.5 21.5 22.1 14.0 25.1 43.8 21.9 21.0 18.9

2018E 12.9 18.7 20.3 31.9 19.7 19.6 12.8 22.7 36.9 20.8 20.0 17.3

P/B (x) 2016 n/a 8.1 5.5 13.0 2.5 1.8 2.4 5.2 10.9 3.7 4.8 3.1

2017E 1.8 5.5 4.0 10.4 2.3 1.8 2.3 4.5 9.2 3.4 4.2 2.7

2018E 1.6 4.2 3.3 8.4 2.1 1.7 2.1 4.0 7.9 3.3 3.7 2.5

EV/EBITDA (x) 2016 n/a 21.2 20.8 23.6 16.8 20.2 17.6 16.2 30.1 10.5 16.4 14.3

2017E 10.9 15.5 15.2 27.0 16.1 15.7 10.7 15.4 31.7 13.7 15.1 12.2

2018E 9.7 11.7 12.8 23.6 14.2 14.0 9.8 14.0 n/a 12.9 13.9 11.6

ROE (%) 2016 33.7 22.1 20.7 37.1 9.5 4.4 5.1 18.7 22.6 16.2 21.0 12.1

2017E 21.1 24.2 17.3 32.3 10.8 7.3 15.6 19.3 23.2 16.4 20.1 14.7

2018E 16.8 26.1 18.1 29.4 10.7 7.7 16.0 18.9 23.2 15.8 18.8 14.4

Return (%) 1m (10.2) (3.7) (4.3) 2.6 1.3 (0.8) (0.4) 5.1 5.6 14.5 (8.5) (1.2)

3m n/a (11.5) 15.9 26.6 (1.3) (1.3) 1.8 6.5 38.3 13.1 3.1 (3.3)

6m n/a (5.4) (17.0) 48.0 6.8 3.8 16.9 20.7 49.0 39.9 7.7 13.2

12m n/a (28.2) (21.5) 42.1 12.6 0.4 (3.1) 5.1 79.5 62.0 (0.2) (10.2)

Ytd n/a (14.0) (12.3) 35.5 8.4 8.6 15.5 20.4 47.8 31.3 5.8 7.1

Note: Valuations based on May 26 closing price and forex rates

Source: Samsung Securities estimates, Bloomberg

Dentium

2017. 6. 15

151

Income statement


Sales 95 120 148 178 206


Gross profit 69 83 106 126 148

Gross margin (%) 72.0 69.4 71.2 71.2 71.5

SG&A expenses 52 55 69 82 94



Non-operating gains (losses) 1 (2) (2) (1) (1)



Equity-method gains (losses) 0 0 0 0 0

Other 0 (1) (1) 0 0


Taxes 3 6 8 10 13




Net profit 14 20 26 32 40

Net margin (%) 15.2 16.7 17.5 18.3 19.3



EBITDA 20 32 40 48 58

EBITDA margin (%) 21.3 27.1 27.1 27.0 27.9



Adjusted EPS (KRW)* 1,308 1,788 2,329 2,899 3,561

Cash flow statement



Net profit 14 20 26 32 40




Other 9 11 9 11 13




Change in financial assets (1) (1) (0) (0) (0)

Other (1) (1) (0) 0 0

Cash flow from financing 15 5 63 9 (1)

Change in debt 16 8 (18) 10 0


Dividends (0) (1) (1) (1) (1)

Other (0) (2) 20 0 0

Change in cash 2 4 24 (14) 33



Gross cash flow 27 35 39 47 57

Free cash flow (13) (1) (39) (22) 34

Note: * Excluding one off items ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation


Balance sheet


Current assets 72 92 132 134 181



Inventories 24 26 31 37 43


Fixed assets 79 95 153 206 208





Total assets 151 187 285 340 389













Other (39) (40) (20) (20) (20)


Total equity 49 69 176 208 247

Net debt 63 67 25 48 16

Financial ratios

Year-end Dec 31 2015 2016 2017E 2018E 2019E

Growth (%)

Sales 11.3 25.7 23.7 19.6 16.3

Operating profit (0.7) 70.1 27.2 21.2 21.9

Net profit (3.8) 38.0 30.3 24.5 22.9

Adjusted EPS** (3.7) 36.7 30.3 24.5 22.9


EPS (parent-based) 1,308 1,788 2,329 2,899 3,561


Adjusted EPS** 1,308 1,788 2,329 2,899 3,561

BVPS 4,384 6,234 20,342 23,963 28,434

DPS (common) 100 100 100 100 100

Valuations (x)

P/E*** 28.6 20.9 16.1 12.9 10.5

P/B*** 8.5 6.0 1.8 1.6 1.3

EV/EBITDA 23.5 14.8 10.9 9.7 7.5

Ratios (%)

ROE 32.4 33.7 21.1 16.8 17.4

ROA 11.0 11.8 11.0 10.4 10.9

ROIC 13.6 16.9 15.7 14.0 15.0

Payout ratio 4.2 3.1 3.3 2.7 2.2


Net debt to equity 129.8 97.0 14.4 23.3 6.3

Interest coverage (x) 15.9 29.7 40.3 51.8 58.6

2017. 6. 15

ST Pharm (237690)

Three things to monitor in 2H

● In 2H, we recommend investors monitor ST Pharm’s API orders for hepatitis C

treatments, the pace of its oligonucleotide sales growth, and whether or not the

firm adds new global clients.

● The stock already seems to have priced in concerns surrounding order declines for

sofosbuvir, but with anticipation building for oligonucleotides-led growth starting

next year, we make it our top 2H pick among pharmaceutical SMEs.

WHAT’S THE STORY?

Top pick for 2H: ST Pharm has highest exposure to exports (83.1% in 2016) among

Korean pharmaceutical SMEs, including API makers, with it largely insulated from

domestic pharmaceutical regulations thanks to long-term CMO contracts with multi-

national pharmaceutical players in the US and Europe. The company’s high-margin

oligonucleotide sales have been growing unexpectedly fast, thus reducing its API

dependence for hepatitis C treatments. In 2H, we recommend monitoring: 1) the size of

API orders for hepatitis C treatments—expected over September-October; 2)

oligonucleotide sales growth; and 3) whether or not it adds new multi-national clients.

Earnings outlook: We expect the sales of ST Pharm to rise 3.4% to KRW207.2b this

year as its operating profit slips 1% to KRW76.8b and margin falls 1.7%pts to 37.1%, with

the latter to owe to increased: 1) R&D expenses for its in-house pipeline; and 2) hiring of

oligonucleotide QA and QC staff. The company in Sep 2016 received USD135m in

sofosbuvir orders for this year (up 19% y-y), but Gilead’s guidance has us expecting its

sales from the drug declining 15.1% to KRW112.5b in 2018, with our forecasts also having

its total sales and operating profit up a respective 4.4% and 1.6% to KRW216.4b and

KRW78b with a margin drop of 1%pt to 36.1%. We foresee its oligonucleotide sales

jumping 77.2% next year to KRW55b, which should account for 25.4% of the total figure,

vs a projected 15% this year and 10.3% in 2016.

Still a BUY: We base our 12-month target price of KRW56,000 on the abovementioned

forecasts, with the shares already reflecting concerns of falling sofosbuvir orders.

Anticipation of oligonucleotides-led growth from next year appears valid, with ST Pharm

set to use its cash (KRW138b as of 1Q) to build a dedicated factory along with investments

for in-house R&D and open innovation systems overseas. * This report was originally published on Jun 9

Company Update


2016 2017E 2018E 2019E

Revenue (KRWb) 200 207 216 236


EPS (adj) (KRW) 3,761 3,230 3,337 3,820

EPS (adj) growth (% y-y) n/a (14.1) 3.3 14.5

EBITDA margin (%) 44.1 43.4 42.7 43.9

ROE (%) 19.6 17.8 15.9 15.9

P/E (adj) (x) 12.9 15.0 14.5 12.7

P/B (x) 2.9 2.5 2.2 1.9

EV/EBITDA (x) 8.8 8.3 7.7 6.3

Dividend yield (%) 1.0 1.0 1.2 1.2


SunYoung Yoon

Analyst


AT A GLANCE



Market cap KRW894.64b/USD798.29m

Shares (float) 18,484,400 (43.2%)



KRW4.8b/ USD4.3m


1M 6M 12M

ST Pharm (%) 5.9 28.6 n/a

Vs Kosdaq (%pts) 4.1 19.0 n/a

KEY CHANGES

(KRW) New Old Diff

Recommend. BUY BUY

Target price 56,000 56,000 0.0%

2017E EPS 3,230 3,463 -6.7%

2018E EPS 3,337 3,352 -0.4%


No of estimates 7

Target price 64,143

Recommendation 4.0


ST Pharm

2017. 6. 15

153

Target-price calculation

(KRWb) 2017E 2018E 2019E

EBITDA 90.0 92.4 103.7

Peer average EV/EBITDA (x) 10.0 9.3 8.6

Target EV 900 859 897

Net borrowings (146) (187) (244)

Fair value (KRW) 56,569 56,570 61,720

Target price (KRW) 57,000 56,000 62,000

Current price (KRW) 48,400 48,400 48,400

Upside (%) 17.8 15.7 28.1



(KRWb) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E 3Q17E 4Q17E 2016 2017E 2018E 2019E

Sales 30.9 69.8 54.0 45.7 47.8 59.0 51.5 48.9 200.4 207.2 216.4 236.1

Chg (% y-y) 73.0 129.8 18.0 3.7 54.8 (15.4) (4.6) 6.9 45.1 3.4 4.4 9.1

Original-drug API 41.9 36.1 39.5 49.5 40.2 36.9 152.8 166.1 170.9 186.3

Generic drug API 9.3 9.4 7.7 8.0 9.5 10.0 39.9 35.2 37.5 40.5

Other 2.8 0.2 0.6 1.5 1.8 2.0 7.7 5.9 8.1 9.3

Gross profit 12.4 35.0 24.6 21.0 22.5 27.9 24.4 22.3 93.0 97.0 101.5 117.9

Chg (% y-y) 125.3 263.7 17.2 38.6 81.6 (20.4) (1.1) 6.2 81.4 4.3 4.6 16.2

Gross margin (%) 40.1 50.2 45.6 45.9 47.0 47.3 47.3 45.5 46.4 46.8 46.9 50.0


Chg (% y-y) 613.6 548.2 22.1 48.4 105.6 (25.2) (9.5) (0.6) 125.1 (1.0) 1.6 14.2

Operating margin (%) 28.0 44.7 38.7 36.8 37.2 39.6 36.7 34.2 38.7 37.1 36.1 37.7

Note: Based on consolidated K-IFRS


Forward EV/EBITDA band Forward P/E band

Source: WiseFn, Samsung Securities estimates Source: WiseFn, Samsung Securities estimates

20,000

30,000

40,000

50,000

60,000

70,000

Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17

(KRW)

10.5x

9.0x

7.5x

6.0x

20,000

30,000

40,000

50,000

60,000

70,000

Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17

(KRW)

15.5x

14.0x

12.5x

11.0x

ST Pharm

2017. 6. 15

154

Sales, by segment Sales, by customer (2016)

Source: Company data, Samsung Securities estimates Source: Company data, Samsung Securities

Order backlog overview (as of March 2017)

(USDm) Placed Due Total size Shipped Backlog

Original small

molecule APIs

2015 Dec 2016 119.6 122.2 0.0

2016 Nov 2017 135.0 18.0 117.0

Oligonucleotides 2015 Dec 2016 11.6 13.6 0.0

2016 Apr 2017 11.0 0.0 11.0

Total 277.3 153.8 128.0


Shareholder breakdown


89.9 132.2 135.1

115.9 110.8

10.4

20.6 31.0 55.0 75.5

17.9

39.9 35.2 37.5

40.5

24.1

7.7 5.9 8.1

9.3

0

50

100

150

200

250

2015 2016 2017E 2018E 2019E

Small molecule APIs Oligonucleotide

Generic APIs Other

(KRWb)

Gilead Sciences

65.2%

Donga ST16.8%

Global 'J'5.3%

Donga Pharm3.2%

US 'R'2.0%

Other7.5%

Dong-A Socio Holdings

33%

CEO JS Kang, et al.

19%BRV Lotus

6%

Employees5%

Others37%

ST Pharm

2017. 6. 15

155

Gilead’s Hepatitis C treatment products

Product Compound List price* Applicable genotypes Status

Sovaldi Sofosbuvir 400mg USD84,000 Genotypes 1 to 4

Launched Dec 2013 (US),

Jan 2014 (EU),

Jan 2015 (India),

May 2015 (Japan)

Harvoni Sofosbuvir 400mg

+ Ledipasvir 90mg USD94,500

Genotypes 1, 4, 5, 6

(mainly for genotype 1)

Launched Oct 2014 (US),

Nov 2014 (EU),

Sep 2015 (Japan)

Epclusa Sofosbuvir 400mg

+ Velpatasvir 100mg USD74,760

First pan-genotype (1-6)

Particularly effective for genotype 3

Approved Jun 2016 (US),

Jul 2016 (EU, Canada)

TBA

Sofosbuvir 400mg

+ velpatasvir 100mg

+ voxilaprevir 100mg

TBA

Pan-genotype (1-6)

For patients who failed prior treatment with DAA**

regimen (including NS5A inhibitors); Also for patients

with cirrhosis; DAA-naïve patients can take 8-week

treatment instead of 12-weeks

Filed NDA Dec 2016 and under

accelerated review (US),

Under accelerated review

Jan 2017 (EU)

Note: * 12-week treatment cost in the US; ** Direct-acting antiviral

Source: Gilead Sciences, media reports, Samsung Securities

FDA-approved Hepatitis C drugs

Approval data Product Compound Company List price* Target genotype Note

2H17E TBA

sofosbuvir

+ velpatasvir

+voxilaprevir

Gilead Sciences TBA Genotypes 1-6

� Under accelerated review for approval

� 12 weeks; 1 pill daily (8 weeks for

treatment-naïve patients)

� Effective for patients with cirrhosis

2H17E TBA glencaprevir

+ pibrentasvir AbbVie TBA Genotypes 1-6

� Under accelerated review for approval

� 8 weeks; 3 pills daily

� Effective for non-cirrhosis patients

Jun 2016 Epclusa sofosbuvir

+ velpatasvir Gilead Sciences USD74,760

Genotypes 1-6

(world’s first pan-

genotype)

� 12 weeks; 1 pill daily

Jan 2016 Zepatier elbasvir

+ grazoprevir Merck USD54,600 Genotypes 1, 4

� 12 or 16 weeks; once daily; with or

without ribavirin

Jul 2015 Daklinza daclatasvir BMS USD63,000 Genotypes 1, 3 � 12 weeks; once daily; 600mg of

dakilinza with sofosbuvir

Dec 2014 (Pak)

Jul 2016 (XR)

Viekira Pak/

Viekira XR

ombitasvir

+ paritaprevir

+ ritonavir

+ dasabuvir

AbbVie USD83,319 Genotype 1

� Viekira Pak: Twice daily (3 pills in the

morning, 1 pill in the evening)

� Viekira XR: once daily; 3 pills

Oct 2014 Harvoni ledipasvir

+ sofosbuvir Gilead Sciences USD95,000 Genotypes 1, 4, 5, 6

� 24 weeks interferon-free or 12 weeks

with ribavirin for genotype 1

2013 Sovaldi sofosbuvir Gilead Sciences USD84,000 Genotypes 1-4

� With peginterferon for genotypes 1 and

4; without interferon for genotypes 2 and

3 (world’s first)

2013 Olysio simeprevir Janssen/Medivir USD66,360 Genotype 1

� With peginterferon alpha and ribavirin; or

12 weeks with sofosbuvir once-daily

(approved Nov 2014)

Note: * US 12-week treatment cost in the US

Source: Company data, media reports, Samsung Securities

ST Pharm

2017. 6. 15

156

Gilead’s hepatitis C drugs: Revenue, by product Gilead’s hepatitis C drugs: Revenue, by region

Source: Gilead Sciences, Samsung Securities Note: ROW included in Japan in 1Q17

Source: Gilead Sciences, Samsung Securities

Gilead’s hepatitis C drugs: Patient initiations Revenue of major players’ hepatitis C drugs

Note: ROW not reported in 1Q17

Source: Gilead Sciences, Samsung Securities


0

1

2

3

4

5

6

4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16

Harvoni Sovaldi Epclusa

(USDb)

0

1

2

3

4

5

6

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

US Europe Japan ROW

(USDb)

0

20

40

60

80

100

120

140

160

180

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

US Europe Japan ROW

('000 patients)

0

1

2

3

4

5

1Q16 2Q16 3Q16 4Q16 1Q17

Harvoni (GS) Sovaldi (GS) Epclusa (GS)

Zepatier (Merck) Viekira (Abbvie)

(USDb)

Gilead still has 80%market share

ST Pharm

2017. 6. 15

157

Gilead: 2017 sales guidance for Hepatitis C treatment products

Source: Gilead Sciences

2017 clinical trial plans for Imetelstat

Source: Geron

ST Pharm

2017. 6. 15

158

Income statement


Sales 138 200 207 216 236


Gross profit 51 93 97 101 118

Gross margin (%) 37.1 46.4 46.8 46.9 50.0

SG&A expenses 17 15 20 23 29



Non-operating gains (losses) 1 3 1 2 2



Equity-method gains (losses) 0 0 (1) 0 0

Other 7 (2) 0 (0) (0)


Taxes 10 19 17 18 20




Net profit 25 61 60 62 71

Net margin (%) 18.2 30.7 29.1 28.8 30.2



EBITDA 41 88 90 92 104

EBITDA margin (%) 29.4 44.1 43.4 42.7 43.9



Adjusted EPS (KRW)* 1,800 3,761 3,230 3,337 3,820

Cash flow statement



Net profit 25 61 60 62 71




Other 16 15 16 16 18




Change in financial assets 10 (61) (4) (8) (3)

Other (21) (16) 1 2 2

Cash flow from financing 7 85 (11) (9) (9)

Change in debt (12) 2 (1) 0 0


Dividends (1) (3) (9) (9) (9)

Other (5) (93) (0) (0) (0)

Change in cash 9 43 27 33 55



Gross cash flow 47 87 89 92 104

Free cash flow 14 35 40 48 65



Balance sheet


Current assets 96 225 263 318 382



Inventories 59 91 98 110 114


Fixed assets 137 143 158 163 164





Total assets 232 368 421 481 546













Other 3 (0) (0) (0) (0)


Total equity 111 313 364 417 479

Net debt 48 (114) (146) (187) (244)

Financial ratios

Year-end Dec 31 2015 2016 2017E 2018E 2019E

Growth (%)

Sales 43.0 45.1 3.4 4.4 9.1

Operating profit 254.3 124.9 (1.0) 1.6 14.2

Net profit 360.8 143.8 (1.9) 3.3 14.5

Adjusted EPS** 360.8 108.9 (14.1) 3.3 14.5


EPS (parent-based) 1,800 3,728 3,230 3,337 3,820


Adjusted EPS** 1,800 3,761 3,230 3,337 3,820

BVPS 7,924 16,791 19,525 22,367 25,691

DPS (common) 250 500 500 600 600

Valuations (x)

P/E*** 26.9 12.7 14.8 14.3 12.5

P/B*** 6.1 2.8 2.4 2.1 1.9

EV/EBITDA 23.2 8.7 8.2 7.5 6.2

Ratios (%)

ROE 30.0 19.6 17.8 15.9 15.9

ROA 13.4 16.7 15.3 13.8 13.9

ROIC 18.0 29.6 28.5 27.0 29.7

Payout ratio 11.7 15.0 15.3 17.8 15.6


Net debt to equity 43.5 (36.3) (40.0) (44.7) (51.0)

Interest coverage (x) 7.8 62.3 2,480.5 5,275.2 6,021.9

Healthcare

2017. 6. 15

159

Compliance notice

- As of Jun 14, 2017, Samsung Securities shared group affiliation with Samsung Biologics.

- As of Jun 14, 2017, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report.

- As of Jun 14, 2017, Samsung Securities' holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such debt instruments

were converted, exceed 1% of each company's outstanding shares.

- This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein.

- All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities.

- Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to another party, without prior express written

permission from Samsung Securities.

- This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its accuracy or completeness.

This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung Securities shall not be liable whatsoever for any

loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based upon publicly

available information and do not necessarily represent the views of management at such affiliates.

- This material has not been distributed to institutional investors or other third parties prior to its publication.

Target price changes in past two years

0

100,000200,000

300,000

400,000500,000

600,000700,000

800,000

900,000

Jun 15 Dec 15 Jun 16 Dec 16 Jun 17

(KRW)

Hanmi Pharmaceutical

0

50,000

100,000

150,000

200,000

250,000

300,000


(KRW)

Samsung Biologics

0

100,000

200,000

300,000

400,000

500,000

600,000


(KRW)

Hugel

0

10,000

20,000

30,000

40,000

50,000

60,000


(KRW)

Dentium

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


(KRW)

ST Pharm

0

20,000

40,000

60,000

80,000

100,000

120,000


(KRW)

Huons

Healthcare

2017. 6. 15

160

Rating changes in past two years

Hanmi Pharmaceutical

Date 2015/9/7 10/27 11/5 11/9 11/23 2016/1/6 2/4 10/27 12/18 2017/1/1 2/8 2/27

Recommendation HOLD HOLD HOLD HOLD HOLD HOLD BUY BUY BUY BUY BUY BUY

Target price (KRW) 321,298 339,658 532,437 642,596 651,776 757,452 804,209 561,076 467,563 392,753 345,997 370,000

Date 4/27 5/30

Recommendation BUY BUY

Target price (KRW) 410,000 450,000

Samsung Biologics

Date 2017/3/7 5/30

Recommendation BUY BUY

Target price (KRW) 230,000 260,000

Hugel

Date 2017/4/3 4/18 4/27

Recommendation BUY BUY BUY

Target price (KRW) 475,000 510,000 570,000

Dentium

Date 2017/5/30

Recommendation BUY

Target price (KRW) 50,000

ST Pharm

Date 2016/12/13 2017/4/10 4/24

Recommendation BUY BUY BUY

Target price (KRW) 58,000 53,000 56,000

Huons

Date 2017/6/15

Recommendation Not Rated

Target price (KRW) n/a

Samsung Securities uses the following investment ratings.

Company

BUY Expected to increase in value by 10% or more within 12 months and

is highly attractive within sector

HOLD Expected to increase/decrease in value by less than 10% within 12 months

SELL Expected to decrease in value by 10% or more within 12 months

Industry

OVERWEIGHT Expected to outperform market by 5% or more within 12 months

NEUTRAL Expected to outperform/underperform market by less than 5%

within 12 months

UNDERWEIGHT Expected to underperform market by 5% or more within 12 months

Percentage of ratings in 12 months prior to Mar 31, 2017

BUY (82%) | HOLD (18%) | SELL (0%)

Healthcare

2017. 6. 15

161

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Documents

jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2017/6/15/... · 2017. 6. 15 Pharmaceuticals(OVERWEIGHT) Earnings growth, R&D results in the spotlight in 2H Global, Korean pharma markets