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Pharmaceuticals
BUY (maintain)
September 26, 2001 (12:50) Yunjeong Cho / (822) 2003.1868 / [email protected]
Additional upturn expected as market leader
ᮣ Biggest beneficiary of medical reform: Yuhan produces a number of original medicines, the sales of which have surged since medical reform. In line with its enhanced image, the company enjoys strong synergy in its operations on the back of stronger consumer preference for its products. ᮣ Strong financial structure: With a net cash position, the company boasts the most stable financial structure among local peers, proven by equity evaluation gains totaling ~W18bn p.a. from its financially sound subsidiaries. ᮣ Technology transfer regarding anti-ulcer agent: Yuhan stands to become a world-renowned pharmaceutical company, with anticipated royalty income of US$100mn, if overseas clinical trials of its anti-ulcer agent YH-1885 are successful. 220.5 33.5 5,360 5,080 149.2 12.1 13.0 1.2 9.6 Note: Adj. EPS* = reported EPS - (extraordinary items + FX translation items + asset valuation items + other non-recurring items) / total shares. PER* = current common share price / adj. EPS*. External growth to continue backed by superb competitiveness
Company update
With a sound business structure bolstered by many popular drugs, Yuhan is expected Reuters code
to be the biggest beneficiary of medical reform, as it has a number of highly recognized Bloomberg code
generic and frequently used prescription medicines. A look at the company’s product Current price (Sep 25)
mix reveals that original products take up 70% of prescription drugs, which translates Fair value
into strong competitiveness and remarkable sales growth. Moreover, prescription drugs, Market cap
which account for 75% of Yuhan’s total sales, should post a YoY growth rate of 25% this 3-mth daily t/o
year, with the company’s FY01F operating revenue (OR) expected to grow 22.5%YoY to Free float
W270.2bn. Meanwhile, sales of non-prescription drugs and export sales should increase Foreign ownership
Abs. performance
By product, top products such as Tridol (painkiller), Cephradine (antibiotic), and Tagamet (anti-ulcer drug) achieved impressive 100%YoY sales growth in 1H01, while Rel. performance
sales of others like Isepacin, Cefaclor (antibiotic), and Almagel (antacid) also grew 50% during the same period. Since medical reform, the sales portion of Yuhan’s top 15 products has soared from 40.2% in 1Q00 to 50.3% in 1Q01 and 51.2% in end-2001 due to the concentration of sales of highly recognized medicines.
Improving profitability
A higher and more concentrated sales portion of core products is unlikely to lead to a on growing sales
decrease in COGS-to-OR due to increased raw material costs and labor expenses including bonuses. As such, the company’s GP margin should edge up to 45.6% in 2000 Meanwhile, its operating profit (OP) margin should climb to 16.1% from 15.5% in 2001 on the back of operational leverage resulting from an increase in OR. Recurring profit (RP) should increase 25.2%YoY to W65.6bn, as the company’s interest income exceeds interest expenses thanks to its net cash position, as well as a rise in equity method valuation gains of W18bn attributable to the improving performances of subsidiaries. Excluding equity method valuation gains, RP is expected to surge 33.3%. Earnings forecast
Source: Company data, Hyundai Securities Ranks at the top in
Despite total borrowings of W110.6bn as of 1H01, Yuhan maintains W26bn in net cash terms of financial
on the back of cash holdings of W136.7bn from increasing cash inflow. Compared to stability
most pharmaceutical plays burdened with hefty interest expenses, the company ranks at the top in terms of financial stability. In addition, the company has seven healthy subsidiaries including Yuhan-Kimberly, Yuhan Chemicals Ind., and Yuhan-Clorox. Among them, equity method valuation is applied to five companies. Equity method valuation gains from the five subsidiaries contribute significantly to earnings. In particular, most equity method valuation gains come from Yuhan-Kimberly, whose ROE amounts to 30.6% with an RP margin of 13% and NAVPS of W55,000. Such equity method valuation gains boost Yuhan’s asset value Affiliates subject to equity method valuation
Equity stake (%) Paid-in capital Total assets
Total liabilities
Note: Based on FY00 results.
Source: Company data Top development
Yuhan established a research lab in 1941 that was separated off as a central research capability in the sector
laboratory in 1983. The central research laboratory was designated as a Korea Good Laboratory Practices-sanctioned (KGLP) manufacturer in 1988, and is equipped with one of the highest-quality research capabilities in Korea. Only three institutions in Korea — Yuhan, Dong-A Pharmaceutical (0064, BUY) and Korea Research Institute of Chemical Technology — have received KGLP designation so far. Yuhan’s research center consists of seven research labs with a total of 196 research personnel including 18 staff members with doctorates, 89 with master’s degrees, 53 with bachelor’s degrees, As of FY00, R&D investment totaled W12.5bn, or ~5.7% of operating revenue. The company tops other local pharmaceutical companies in terms of the number of research personnel and investment amount, indicating that it has secured competitiveness in the High growth potential
Yuhan completed a successful technology transfer of the anti-ulcer agent YH-1885 to from technology
SmithKline Beecham in late 2000. In return for transferring the global manufacturing transfer of anti-ulcer
and distribution rights (excluding the Korean market), Yuhan will receive a total of US$100mn in royalties for the product’s successful commercialization and 10% of net The agent inhibits the secretion of gastric acid and is recognized as a next-generation anti-ulcer agent. The advantages of the agent include longer efficacy than existing drugs and the absence of side effects from long-term usage. The contract amount is the record After the technology transfer, SmithKline Beecham and Glaxo merged, becoming Glaxo, SmithKline Beecham (GSK). The global ulcer treatment market currently amounts to ~US$17bn-20bn. SmithKline sees annual sales of ~US$1bn with its first-generation ulcer treatment Tagamet, while Glaxo rakes in US$2.2bn annually with its second-generation ulcer drug Zantac. As such, Yuhan’s new anti-ulcer agent is highly likely to emerge as the merged company’s core product to challenge the market position of Astra’s Losec, a GSK is currently conducting clinical study phase I, with the hope of launching the product in 2006. However, the launch date could be moved up, considering the patent on Losec expires in 2001. The outcome of the research on YH-1885 should be very promising, as the stability and effectiveness of the agent was already proved in domestic clinical trial phase I. As such, when YH-1885 is successfully commercialized, Yuhan is expected to see sales as high as W80bn, or 30% of the domestic ulcer treatment market worth W250bn, from the domestic distribution of the drug, as well as royalty income.
Royalty income should be substantial for Yuhan since GSK is targeting the ulcer treatment market dominated by Losec (annual sales of US$5.7bn) with the drug to be New drugs being developed by Yuhan
Developmental stage
Commercialization
Expected sales
Source: Company data (Yuhan R&D Center, as of 2001) Additional hike
Since Jul 2001, Yuhan has driven an overall rally of pharmaceutical stocks, breaking this possible thanks to its
year’s peak of W67,900 on the back of its improved operational performance following market leader position
While the KOSPI has fallen 12.6% since the terrorist attacks on the US, Yuhan has dropped a mere 0.8%, proving its market-dominant position. Although the company fell only slightly amid the recent bearish market, we believe it still has upside potential, considering that pharmaceutical plays should emerge as attractive investment targets for the following reasons: 1) local pharmaceutical companies mainly focus on domestic demand and thus remain insensitive to external changes; and 2) the plays, as defensive stocks, show relatively limited downside potential compared with other sectors during Moreover, if the overseas clinical trial for the anti-ulcer agent succeeds, an expected technology transfer promises huge royalty income for Yuhan, which would become one of the world’s top pharmaceutical plays, making it all the more attractive to investors. Yuhan currently trades at FY01F and FY02F PER of 8.9x and 7.7x, respectively, which are slightly higher than the pharmaceutical sector average. However, the figures are over 20% discounts to the manufacturing sector average. If the company receives some portion of royalties within this year from the technology transfer of YH-1885 to GSK, assuming overseas clinical trials are successful, its EPS should increase by 23-47%. As such, we reiterate BUY with fair value of W70,00, calculated by applying a 20% premium to the sector average considering its market leader position.
Relative performance
Financial statement
YE Dec (Wbn)
statement
Operating
188.5 220.5 270.2 320.3 374.0
Operating
25.2 34.2 43.6 54.1 64.5
Recurring
26.2 52.4 65.6 77.0 87.4
33.0 33.5 42.0 49.2 55.9
Net exceptionals
ex-exceptionals
11.9 31.8 42.9 50.1 56.8
Balance sheet
508.1 538.1 583.1 633.9 689.5
liabilities
223.1 214.7 221.6 235.2 240.9
shareholders'
508.1 538.1 583.1 633.8 688.7
Cash flow
18.7 29.6 39.3 49.5 59.3
4.4 16.6 15.5 10.4 19.8
40.6 8.4 8.8 2.7
Net cash (debt) at YE
Value creation
Financial leverage
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