Healthcare. abc. Healthcare team

Transcription

1 team Nam Park* Regional Head of Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited Carolyn Poon* Analyst The Hongkong and Shanghai Banking Corporation Limited Girish Bakhru* Analyst HSBC Securities and Capital Markets (India) Private Limited *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations 1

2 2 Sector structure Asia-Pacific Equity Research Pharmaceutical Medical device Drug / Medical device distributors Medical services providers Chemical drugs Biologics Original Generics Original Biosimilar Source: HSBC

3 Dec-11 MSCI Asia ex Japan Index Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-10 Dec-06 Dec-07 Dec-08 Dec-09 Source: MSCI, Bloomberg, HSBC Global Financial Crisis European Debt Crisis 3

4 4 EBIT margin asset turnover ( average) % High asset turn efficient v olume driv en strategies Green Cross Corp 1.0 IPCA Laboratories Cadila Ltd Lupin High asset turn and high margins; profitable industry leaders strategies Asia-Pacific Equity Research LG Life Sciences Ltd. Torrent Pharma 0.8 Dr. Reddy 's Lab. Biocon Limited Asset Turnover(x) 0.6 Dong-A Pharmaceutical Co Cipla United Laboratories Int Ranbax y Mindray Medical Internati 0.68 Yuhan Corp Shandong Weigao Group Divis Laboratories Sun Pharma 0.4 Low ROA companies. Business restructuriung may be required 3Sbio Inc Microport Scientific High margins; niche play ers or brands with strong pricing power 0.2 Celltrion - 0% 10% 20% 30% 40% 50% 60% 70% EBIT Margin(%) Source: Thomson Reuters Datastream, HSBC

5 Sector description Pharmaceutical companies develop, produce and markets drugs licensed for use as medications. They deal in generic and/or branded medications and are subject to a variety of laws and regulations regarding the patenting, testing and ensuring safety and efficacy and marketing of drugs. Medical device companies develop, manufacture and markets devices for medical purposes. They include instruments, apparatus, machines, implants or materials used in human beings for diagnosis, prevention, treatment, monitoring of diseases or injuries, or for rehabilitation purposes. Drug companies are also subject to a variety of laws and regulations regarding quality standard, safety and patents. Nam Park* Regional Head of Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited [email protected] *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Medical distributors distribute drug and medical devices from manufacturers to medical service providers. Distributors also provide value-added services like drug information statistics. Some forms of delivery, especially vaccines and biopharma drugs, require expert handling (e.g. special temperature storage facilities). Medical service providers offer preventive, curative, promotional or rehabilitative healthcare services to individuals, families or communities. They include institutions like hospitals, healthcare centres, pharmacies, medical laboratory or research centres. Key themes is an emerging sector in the MSCI Asia ex Japan universe. Its market cap is still rather small at USD22bn and is also one of the least liquid sectors. However, the sector has performed well it is up 102% since January 2000 with most growth coming in recent years. It is also one of the fastest growing industries. The Asia healthcare market was estimated to be USD246bn in 2009 by Frost & Sullivan, or 24% of the global healthcare market of USD1.06trn. The global market for pharmaceuticals reached USD830bn in It is now increasingly driven by demand in emerging markets China is already the third largest market. Asia pharmaceutical companies are moving up the value-added curve and starting to shift from being purely generics producers or distributors of foreign drugs to doing their own R&D. The larger Asian players are producers of generic products such as India s Dr. Reddy s Labs and Sun Pharma as well as biosimilar makers such as Korea s Celltrion. The bigger players in China include distributors Sinopharm and medical device player Shandong Weigao. Biologics: one of the fastest growth areas Biologics complex, expensive drugs made from living cells accounted for 14% of the global drug market in Within biologics, monoclonal antibodies (mabs), which stimulate the patient s immune system to attack malignant tumours, are at the forefront of targeted therapies for cancers and autoimmune diseases. We expect the biologics market to expand at a CAGR of 8.5%, much faster than the global market s 3-5%. But the biologics market is about to see major changes; the production of more affordable copies of original biologics known as biosimilars are set for rapid growth as patents on the original expensive blockbuster drugs expire. This will provide an opportunity for other drug makers to develop and produce biosimilars. By 2015 we forecast that biosimilars will account for about 9% (USD15bn) of total biologics, implying a CAGR of about 40%. However, regulatory, technical and capital barriers to entry are high for biosimilars, 5

6 particularly in developed markets. Regulators are setting the bar high, commercial plants can cost hundreds of millions of US dollars and take years to build and certify, and these facilities need to be operated with strict quality control as even minor deviations in the manufacturing process can lead to unacceptable products. In our view, some firms in Asia are well positioned to ride the global biosimilar trend. Patent expiries at peak Some of the most popular branded drugs, with sales about USD37bn, are set to lose patent protection in the US in 2012, offering opportunities for US and Indian makers of generic drugs. In addition, the rapid increase in sales in emerging markets, including India, Russia and Latam, along with rationalisation of costs, will drive earnings. Sector drivers Ageing populations This will underpin demand in healthcare in Asia. In general, senior citizens spend more on healthcare, especially now that people are having fewer children (e.g. the one-child policy in China) and retire earlier. According to United Nations, one quarter of China s population will be over 65 by Higher disposable incomes The fast-growing economies in Asia are another growth driver for healthcare in Asia. A recent OECD study projected that the middle class in the Asia Pacific would represent 54% of the world s total by For , the IMF estimates that China, India and Korea to have GDP per capita CAGR of 9.3%, 8.8% and 6.8%, respectively. Higher government healthcare spending, greater accessibility Higher government spending on healthcare will also drive growth. Emerging countries in Asia have been playing catch up when it comes to healthcare, yet their spending is mostly below 5% of GDP; developed countries public healthcare budgets are as much as 7-8% of GDP. Higher government spending in emerging countries includes healthcare infrastructure upgrades, building public hospitals, and subsidising patients directly via insurance schemes. Valuation We value healthcare companies mainly based on PE multiples, DCF, or a mixture of both. We also use DCF because we do not want to neglect mid to longer-term multiple-year growth of healthcare companies. We derive our PE multiples using one of the three methods below: 1 PE multiple using 1x PEG ratio, with appropriate discount applied afterwards; 2 PE target multiple from a sustainable, long-term ROE, calculated as follows: Target PE = (RoE g) / (RoE [CoE g]) 3 PE multiple using industry average as benchmark. 6

7 Asia : Growth and profitability (calendarised data) e 2012e Growth Sales 17.3% -2.6% 25.4% 21.6% 9.8% EBITDA 20.3% -11.1% 37.1% 31.2% 13.7% EBIT 20.5% -13.0% 36.6% 35.1% 14.8% Net profits 9.5% -5.8% 42.4% 50.1% 0.0% Margins EBITDA 25.5% 23.3% 25.4% 27.4% 28.4% EBIT 22.2% 19.9% 21.6% 24.0% 25.1% Net profit 15.7% 15.2% 17.2% 21.2% 19.3% Productivity Capex/sales 12% 6% 15% 11% 7% Asset turnover (x) 0.6x 0.6x 0.6x 0.6x 0.6x Net debt/equity -0.1x -0.1x -0.1x -0.1x -0.2x ROE 16% 14% 15% 19% 18% Note: Based on all HSBC coverage of healthcare companies across Asia. All data is market cap weighted Source: company data, HSBC estimates 7

8 Sector snapshot Key sector stats 0.9% of MSCI Asia ex-jp Trading data ADTV (USDm) 136 Aggregated market cap (USDm) 21,355 Performance since 1 Jan 2000 Absolute 102% Relative to MSCI Asia 2.5x 3 largest stocks SUN PHARMA, DR REDDY S, CELLTRION Correlations (5-year) with MSCI Asia 0.78 Source: MSCI, Thomson Reuters Datastream, Bloomberg, HSBC Top 10 stocks Stock rank Stocks Index weight 1 SUN PHARMA 14.9% 2 DR REDDY S 13.8% 3 CELLTRION INCORP 13.6% 4 KALBE FARMA 9.0% 5 CIPLA LTD 9.0% 6 SINOPHARM GROUP 8.3% 7 SHANDONG WEIGAO 7.1% 8 LUPIN LTD 6.8% 9 RANBAXY LABS 5.2% 10 YUHAN CORP 4.3% Source: MSCI, Thomson Reuters Datastream, HSBC Country breakdown Country Weights (%) INDIA 53.2 CHINA 21.6 KOREA 16.4 INDONESIA 8.8 Source: MSCI, Thomson Reuters Datastream, HSBC Core industry driver: public and private healthcare expenditure (% of GDP) 8% 6% 4% 2% 0% Source: OECD, HSBC PE band chart Price level China India Indonesia Korea public ex penditure priv ate ex penditure 25x 20x 15x 10x Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: MSCI, Thomson Reuters Datastream, HSBC PB vs ROE (12-month forward) Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Fwd ROE % (LHS) Fw d PB (x ) Source: MSCI, Thomson Reuters Datastream, HSBC 8