1. No category

23 February 2015
Sector Report
Healthcare Sector
Healthcare Sector
UP
Outsourcing trend on the rise
MP
OP
Valuation summary
Company
name
Stock Market Cap
ticker
(HK$mn)
Quintiles*
Q US
Covance Inc*
CVD US
Parexel Int’l*
PRXL US
Wuxi Pharmatech*
WX US
Sinopharm
1099 HK
Shanghai Pharma
2607 HK
Sihuan Pharma
460 HK
CMS
867 HK
Pioneer Pharma
1345 HK
Fudan Zhangjiang
1349 HK
Essex Bio
1061 HK
Huadong Medicine 000963 CH
Hangzhou Tigermed 300347 CH
62,832.2
47,025.2
27,017.2
22,947.3
75,956.8
54,609.0
45,291.5
30,377.5
6,373.3
5,501.1
1,876.2
28,234.4
11,994.0
– EPS Consensus –
FY14E
FY15E
(HK$)
(HK$)
2.70
3.09
3.80
4.27
2.17
2.75
1.85
2.11
1.10
1.30
0.93
1.06
0.17
0.21
0.06
0.07
0.23
0.31
0.11
0.13
0.11
0.17
2.16
2.97
0.76
1.09
–––– P/E ––––
FY14E
FY15E
(x)
(x)
24.5
21.1
28.0
24.9
29.8
23.1
22.4
19.6
20.0
17.1
14.1
12.4
21.0
17.1
28.4
22.5
16.7
12.5
43.7
37.0
30.6
19.8
30.1
21.9
75.0
52.3
–––– P/B ––––
FY14E
FY15E
(x)
(x)
n.a.
n.a.
3.5
3.1
6.3
5.0
3.5
3.0
2.1
1.9
1.3
1.2
4.1
3.5
6.3
5.3
4.1
3.4
n.a.
n.a.
5.9
4.8
7.2
5.8
5.8
6.5
Yield
Outsourcing is increasingly
adopted by the major
pharmaceutical companies as it
allows for better flexibility and
cost efficiency.
(%)
0.0
0.0
0.0
0.0
1.6
1.8
1.4
1.2
3.5
0.0
0.6
1.6
n.a
CRO is the most common and
well accepted model used by the
industry, and CROs in China have
been ramping up quickly in recent
years.
We believe CSO presents notable
business potential in China, given
the fast expanding market and
the fragmented nature of the
healthcare industry.
Source: Bloomberg, BOCOM Int’l, as of Feb 22, 2015, * EPS consensus are denominated in USD
Outsourcing is increasingly adopted by the major pharmaceutical companies, due
to: 1) patent cliff; 2) lengthy and costly R&D process; 3) stricter regulatory scrutiny
on drug promotions; and 4) the emergence of small-scale biotech companies.
CRO (Contract Research Organization) is the most common and widely accepted
model used in the industry. The global CRO market grew at a CAGR of 14% during
2007-2013 and we expect this growth momentum to sustain, given: 1) more R&D
investments are shifted towards outsourced services; and 2) CROs are broadening its
coverage to gradually participate in the entire processing chain, from drug
development to product manufacturing.
Sector Valuation (A+H)
(X)
FY15E weighted avg P/E
FY16E weighted avg P/E
FY15E weighted avg P/B
24.6
20.3
4.3
Source: Company data, BOCOM Int’l
Historical P/E Chart
Hk_Healthcare
30
+1 STD
-1 STD
25
20
15
10
The fragmentation of China’s pharmaceutical industry provides a unique
opportunity for CSO market expansion, as we believe: 1) local CROs in China will
expand its business scope into the CSO business; 2) key distributors are taking the
initiatives to start participating in the CSO market, such as Sinopharm (1099.HK); 3)
Shanghai Pharm (2607.HK) has been developing its internal CSO business unit; 4) the
unique approach taken by Sihuan Pharma (460.HK) implies business model
transformation from the pharmaceutical agent model to the CSO model.
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Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Source: Bloomberg
1 – Year Sector Performance
Hk_Healthcare
Hang Seng Index
Source: Bloomberg
Milo Liu
milo.liu@bocomgroup.com
Tel: (852) 2977 9387
Jan-15
Feb-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
150
140
130
120
110
100
90
80
May-14
CSO market in China proved to have similar business trends and opportunities as in
the international market. Instead of building in-house sales teams, certain MNCs are
collaborating with local CSOs in China on promotion and marketing. Various local
pharmaceutical companies with in-house sales representatives also seek to become
CSOs for MNCs, in order to enrich their product portfolios.
0
Feb-10
Feb-14
The CSO (Contract Sales Organization) market in China has also been growing
rapidly, which grew at a CAGR of 38% in 2008-2013 to RMB13bn. The two largest
CSOs in China are China Medical System (867.HK) and Pioneer Pharma (1345.HK),
both of which focus on products manufactured by overseas companies. They took up
~28% share of the China CSO market, according to a Frost & Sullivan report.
5
Mar-14
China CRO industry has been ramping up quickly in recent years, registering a CAGR
of 25% during 2007-2013, reaching US$2bn. There are ~500 local companies involved
in CRO market in China, of which the leading five represent ~15% market share.
Healthcare Sector
23 February 2015
Outsourcing is being used as a widely accepted business strategy among the major
pharmaceutical companies globally as well as in China. This trend has been basically
driven by: 1) patent cliff, estimated to bring in significant lost sales to the pharmaceutical
companies; 2) lengthy and costly R&D process for a new drug, which typically requires
more than 10 years of development and substantial upfront investment; 3) stricter
regulatory scrutiny on drug promotions; and 4) the emergence of small-scale biotech
companies. Outsourcing allows pharmaceutical companies to better preserve flexibility
and efficiency, reduce costs, turn fixed costs into variable costs, and move assets off the
balance sheets. The complexity of the pharmaceutical value chain offers phenomenal
outsourcing opportunities in the industry.
Figure 1: Estimated sales of off-patented drugs result in patent cliff (US$bn)
Spend on off-patented drug
35
28.7
30
25
20
15
14.6
15.3
12.6
10.4
10
7.0
6.2
5
4.2
3.6
3.0
2018E
2019E
2020E
1.3
0
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
Source: IMS Health Data, BOCOM Int’l
Figure 2: Lengthy process of drug development
Source: http://www.yalescientific.org/2013/02/match-manipulate-medicate-old-drugs-targeted-for-new-use/
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2
Healthcare Sector
23 February 2015
Contract Research Organization (CRO) is the most common and widely accepted model
in the industry. According to Frost and Sullivan, the world’s CRO market was ~US$16bn in
2007 and surged to ~US$35bn in 2013 at a CAGR of 14% during the period. We expect
this growth momentum to sustain, driven by: 1) increasing R&D investments (at clinical
trial stage) shifted towards outsourced services; and 2) CROs are broadening its coverage
to gradually participate in pre-clinical research and post-clinical research.
Figure 3: Global CRO market size (US$bn)
Global CRO Market Size
19%
40
YoY
14%
30
13%
25
11%
11%
20
15
10
5
0
2007
2008
2009
2010
2011
2012
Outsourcing Penetration
50%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
17%
16%
35
Figure 4: Global clinical CRO penetration rate
44%
45%
42%
40%
38%
40%
35%
35%
36%
33%
30%
25%
20%
2009
2013
Source: Frost and Sullivan, BOCOM Int’l
2010
2011
2012
2013
2014E
2015E
Source: Frost and Sullivan, BOCOM Int’l
China CRO industry has been ramping up quickly in recent years, growing at a CAGR of
25% during 2007-2013 to US$2bn and occupying ~7% of global market share in 2013.
There are several globally renowned CRO companies, including Quintiles (Q.US), Covance
(CVD.US) and Parexel (PRXL.US), which have entered the Chinese market through
proprietorship, corporation or acquisition, setting the industry standard in early years.
There are also active local CROs, such as Wuxi Pharmatech (WX.US), Venture Pharma
(8225.HK), ShangPharma, Asymchem and Hangzhou Tigermed (300347.CH). They are the
leading local CRO companies in China, together representing ~15% of China CRO market
share.
Figure 5: China CRO market size (US$bn)
China CRO Market Size
YoY
4.5
40%
34%
4.0
31%
35%
31%
3.5
30%
24%
3.0
25%
2.5
2.0
18%
16%
16%
17%
15%
15%
17%
20%
15%
1.5
1.0
10%
0.5
5%
0.0
0%
2007
2008
2009
2010
2011
2012
2013
2014E 2015E 2016E 2017E
Source: Genetic Engineering & Biotechnology News
http://www.genengnews.com/gen-articles/china-and-india-in-global-drug-r-d-outsourcing/4596/
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3
Healthcare Sector
23 February 2015
Contract Sales Organization (CSO) has been emerging over the last two decades.
Multinational Pharmaceutical Companies (MNCs) generally outsource their drugs sales
when the drugs are mature and the patents expire, or in the territories where they have
yet to establish their own sales teams. For example, in 2008, MSD cut 1,200 sales
personnel and outsourced sales of Cozaar and Hyzza to InVentiv Health. MNCs have been
continuously cutting their in-house sales teams over the recent years, owing to: 1)
cost-saving pressure due to patent cliff; and 2) stricter regulatory scrutiny on drug
promotions. Some small R&D-focused biotech companies with no in-house sales teams
also prefer to use CSOs for product launches.
The global CSO market is smaller than the CRO market, given: 1) it has only been around
for two decades, relatively new compared with CRO market; and 2) different countries
deploy slightly different approaches which require more flexibility and nimbleness in
coping with market regulations, in our view.
Figure 6: Global CSO market size (US$bn)
Figure 7: Global CSO market share
Global CSO Market Size
6.0
YoY
15%
5.0
13%
13%
11%
16%
14%
12%
14%
United Drug
17%
12%
4.0
3.0
InVentiv 14%
18%
16%
8%
Publicis
Touchpoint
10%
PDI. Inc. 4%
10%
8%
2.0
6%
4%
1.0
2%
0%
0.0
Quintiles
29%
Others 26%
2007 2008 2009 2010 2011 2012 2013 2014
Source: Capgemini Consulting
http://www.capgemini-consulting.com/blog/accelerating-life-sciences-transf
ormation/2013/05/disrupting-the-traditional-commercial-model
Source: Sutherland Global Services
http://issuu.com/sutherlandresearch/docs/contract_sales_organizations_mar
ket
CSO market in China proved to have similar business trends and opportunities as in the
international market. Instead of building their in-house teams from scratch, several
MNCs are collaborating with local CSOs in China. Various local pharmaceutical companies,
which have their in-house sales representatives, also seek to become CSOs of MNCs, in
order to enrich their product portfolios. For example, Pioneer Pharma (1345.HK) is the
CSO partner of Alcon for ophthalmic remedies, while Essex Bio (1061.HK) is the CSO
partner of Pfizer for ophthalmic remedies. Moreover, there are a few examples of
R&D-focused companies with CSO business. For example, NT Pharma (1011.HK) formed
CSO partnerships with Sanofi Pasteur and Fudan-Zhangjiang (1349.HK), primarily for the
vaccines and Libod (Doxorubicin Liposome Injections) products, respectively.
The CSO market in China has been growing rapidly at a CAGR of 38% during 2008-2013
to RMB13bn. The two largest CSOs in China are China Medical System (867.HK) and
Pioneer Pharma (1345.HK), both of which focus on products manufactured by overseas
companies. The CSO market in China is more fragmented than global CSO market, as the
leading five companies only represent ~44% market share in the CSO market in 2012,
according to Frost & Sullivan, versus 74% by the top 5 global CSO companies.
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China CSO market size has been
outgrowing the CRO market since 2012,
attribute to: 1) a lack of R&D capability in
drug development; 2) high demand due
to large population; and 3) the global
CRO that began in early 1970s when
China was under-developed.
4
Healthcare Sector
23 February 2015
Figure 8: China pharmaceutical CSO market size (RMBbn)
Market Size
40
YoY
70%
62%
35
60%
30
25
20
50%
38% 38%
27%
31% 31% 32% 32% 30%
15
Figure 9: Market share of CSOs in China
Rxmidas 4%
NT Pharm 5%
Eddingpharm
8%
Others 56%
40%
30%
Pioneer
Pharma 9%
20%
10
5
10%
0
0%
2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Source: Frost & Sullivan (2012), BOCOM Int’l
China
Medical
System 18%
Source: Frost & Sullivan (2012), BOCOM Int’l
The fragmented nature of China’s pharmaceutical industry provides a unique
opportunity for CSO market expansion. China currently has 4,500 pharmaceutical
companies, of which only 15% have established in-house sales teams, and the rest rely
heavily on agents. There are currently ~500,000 sales reps in China, and less than 20% of
them are employed as in-house sales reps, with the rest self-employed or employed by
agents. These agents are generally in small scale and loosely controlled by the
manufacturers, and they work on a buy-and-sell basis in certain regions. We believe the
unique approach of Sihuan Pharma (460.HK) to manage its agents (composed of ~20,000
sales reps) is a good example, indicating business transformation from the
pharmaceutical agent model to the CSO model.
The difference between agent and
CSO is that agent is responsible for
sales while CSO brings integrated
solutions to the pharmaceutical
company, including product
positioning, hospital penetration,
technical support, product
management and most importantly,
certain risk-taking (such as price
erosion from the tendering) for the
pharmaceutical companies.
We expect local CROs in China will expand its business scope into the CSO business. The
world’s largest CRO Quintiles has already expanded the scope of business into CSO in
China, providing integrated end-to-end solutions to the pharmaceutical companies in
different stages. Some domestic CROs also added CSO services to the business model,
such as CareWay, which believes the flexible business model could secure long-term
strategic collaborations with the pharmaceutical companies. More local CROs will likely
follow suit, eventually becoming comprehensive providers of a broad range of drug
development and other support services for the healthcare industry.
Domestic pharmaceutical distributors are also taking the initiative to start participating
in the CSO market. Sinopharm (1099.HK) signed a cooperation agreement with
AstraZeneca for the marketing and distribution of Betaloc in Jun 2014. We consider the
cooperation a milestone for Sinopharm to expand into the CSO business. In Oct 2014,
Sinopharm and Pfizer launched the “County Hospital Program” to improve the medical
capabilities of county hospitals, and help these hospitals to set up standardized Stoke
Centers and Chest Pain Centers (CPC) in order to enhance their influence as a step of
preparation for future drug marketing initiatives. We expect Sinopharm to become a
major CSO partner of Pfizer in the future, and the new business model may be considered
an extension of its business to the upper stream of the supply value chain.
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5
Healthcare Sector
23 February 2015
Other pharmaceutical distributors are also developing CSO businesses. For example,
Huadong Medicine (000963.CH) is the CSO partner for several local and overseas
biopharmaceutical manufacturers, such as Octapharma for human serum albumin (HSA),
and LG Life Sciences for Hyaluronic Acid (HA).
Shanghai Pharma (2607.HK) is also developing its internal CSO business unit. Shanghai
Pharma has over 20 subsidiaries covering the entire value chain from manufacturing,
distribution to retail, and has become one of the largest CSOs of Pfizer in China for
products such as Prevenar, an invasive disease prevention drug for infants. They recently
introduced “integration of manufacturing and distribution strategy” to boost internal
synergies, allocating more sales force from the distribution and retail subsidiaries to the
manufacturing subsidiaries. We consider this a great example of internalizing the CSO
model, and we will not be surprised to see other pharmaceutical companies follow suit.
We believe CSOs present notable business potential in China, and we believe: 1) local
CROs in China will expand its business scope into the CSO business; 2) key distributors are
taking the initiatives to start participating in the CSO market, such as Sinopharm
(1099.HK); 3) Shanghai Pharm (2607.HK) has been developing its internal CSO business
unit; 4) the unique approach taken by Sihuan Pharma (460.HK) implies business model
transformation from the pharmaceutical agent model to the CSO model.
Figure 10: Valuation of listed peers
Name
中文名 Stock Code
Mkt Cap
Currency
(HK$mn)
International peers
Quintiles Transnational
Covance Inc
Parexel International
Wuxi Pharmatech
Simple average
Weighted average
Domestic peers
Sinopharm
Shanghai Pharma
Sihuan Pharma
China Medical System
China Pioneer Pharma
Fudan Zhangjiang
Essex Bio
Huadong Medicine
Hangzhou Tigermed
Simple average
Weighted average
–––––––P/E–––––––
–––––––P/B–––––––
–Gross Margin (%)–
Operating Margin (%)
13A
14E
15E
13A
14E
15E
13A
14E
15E
13A
14E
15E
昆泰跨国控股公司
科文斯股份有限公司
百瑞精鼎国际公司
药明康德有限公司
Q US
CVD US
PRXL US
WX US
62,832.2
47,025.2
27,017.2
22,947.3
USD
USD
USD
USD
33.0
32.4
37.9
25.1
33.6
38.7
24.5
28.0
29.8
22.4
26.2
26.1
21.1
24.9
23.1
19.6
22.2
22.3
n.a.
3.2
4.8
3.7
4.0
4.3
n.a.
3.5
6.3
3.5
4.4
2.6
n.a.
3.1
5.0
3.0
3.7
2.2
26.2
27.4
26.4
36.6
35.2
30.6
33.5
38.7
35.4
30.9
34.7
38.6
9.1
8.4
6.8
18.2
13.9
11.4
10.1
19.3
14.4
12.3
10.9
19.6
国药控股股份有限公司
上海医药
四环医药
康哲药业
中国先锋医药
复旦张江
亿胜生物科技
华东医药
泰格医药
1099 HK
2607 HK
460 HK
867 HK
1345 HK
1349 HK
1061 HK
000963 CH
300347 CH
75,956.8
54,609.0
45,291.5
30,377.5
6,373.3
5,501.1
1,876.2
28,234.4
11,994.0
HKD
HKD
HKD
HKD
HKD
HKD
HKD
CNY
CNY
24.3
15.5
25.8
37.1
16.0
47.8
33.7
38.5
72.3
34.6
30.9
20.0
14.1
21.0
28.4
16.7
43.7
30.6
30.1
75.0
31.1
24.1
17.1
12.4
17.1
22.5
12.5
37.0
19.8
21.9
52.3
23.6
19.2
2.0
1.5
3.6
4.9
3.0
8.4
4.6
7.8
9.1
5.0
4.1
2.1
1.3
4.1
6.3
4.1
n.a.
5.9
7.2
5.8
4.6
3.5
1.9
1.2
3.5
5.3
3.4
n.a.
4.8
5.8
6.5
4.0
3.1
8.0
12.8
78.2
54.5
30.4
92.1
89.6
19.9
44.8
8.1
12.3
79.3
54.4
32.8
n.a.
79.7
21.1
46.9
8.1
12.0
79.1
54.6
34.9
n.a.
78.6
21.6
46.1
3.6
3.4
30.9
32.6
21.3
26.1
21.1
6.2
26.6
3.9
3.6
38.3
30.0
22.3
n.a.
15.6
6.1
28.8
3.9
3.6
38.7
30.0
23.9
n.a.
17.2
6.5
26.5
Source: Bloomberg, BOCOM Int’l, as of Feb 22, 2015
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Healthcare Sector
23 February 2015
BOCOM International
11/F, Man Yee Building, 68 Des Voeux Road, Central, Hong Kong
Main: + 852 3710 3328
Fax: + 852 3798 0133
Rating System
Company Rating
www.bocomgroup.com
Sector Rating
Buy: Expect more than 20% upside in 12 months
LT Buy: Expect more than 20% upside but longer than 12 months
Neutral: Expect low volatility
Sell: Expect more than 20% downside in 12 months
Outperform (“OP”): Expect more than 10% upside in 12 months
Market perform (“MP”): Expect low volatility
Underperform (“UP”): Expect more than 10% downside in 12 months
Research Team
Head of Research
@bocomgroup.com
Raymond CHENG, CFA, CPA, CA
(852) 2977 9393
raymond.cheng
(852) 2977 9384
hao.hong
Strategy
@bocomgroup.com
Economics
Hao HONG, CFA
Banks/Network Financials
Qingli YANG
Miaoxian LI
(86) 10 8800 9788 - 8043
miaoxian.li
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(852) 2977 9212
yangqingli
Fei WU
(852) 2977 9392
fei.wu
Shanshan LI, CFA
(86) 10 8800 9788 - 8058
lishanshan
Tony LIU
(852) 2977 9390
xutong.liu
Li WAN, CFA
(86) 10 8800 9788 - 8051
Wanli
Consumer Discretionary
Property
Phoebe WONG
(852) 2977 9391
phoebe.wong
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(852) 2977 9205
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(852) 2977 9221
summer.wang
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(852) 2977 9386
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(852) 2977 9387
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Jerry LI
(852) 2977 9389
liwenbing
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(852) 2977 9250
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Yuan MA, PhD
(86) 10 8800 9788 - 8039
yuan.ma
Connie GU, CPA
(86) 10 8800 9788 - 8045
conniegu
(852) 2977 9243
jovi.li
Consumer Staples
(852) 2977 9235
alfred.lau
Luella GUO
(852) 2977 9211
luella.guo
(86) 21 6065 3606
louis.sun
(852) 2977 9209
lizhiwu
(852) 2977 9216
miles.xie
Geoffrey CHENG, CFA
(852) 2977 9380
geoffrey.cheng
Fay ZHOU
(852) 2977 9381
fay.zhou
(86) 21 6065 3675
wei.yao
Renewable Energy
Healthcare
Louis SUN
Telecom & Small/ Mid-Caps
Milo LIU
Insurance & Brokerage
Zhiwu LI
Technology
Internet
Miles XIE
Transportation & Industrial
Metals & Mining
Jovi LI
Alfred LAU, CFA, FRM
Automobile
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Wei YAO
7
Healthcare Sector
23 February 2015
Analyst Certification
The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any
and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the
specific recommendations or views expressed in this report; (iii) no insider information/ non-public price-sensitive information in relation to
the subject securities or issuers which may influence the recommendations were being received by the authors.
The authors of this report further confirm that (i) neither they nor their respective associates (as defined in the Code of Conduct issued by the
Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior
to the date of issue of the report; (ii)) neither they nor their respective associates serve as an officer of any of the Hong Kong listed companies
covered in this report; and (iii) neither they nor their respective associates have any financial interests in the stock(s) covered in this report.
Disclosure of relevant business relationships
BOCOM International Securities Limited, and/or its associated companies, has investment banking relationship with Bank of Communications,
Harbin Bank Co., Ltd., Azure Orbit International Finance Limited, Hanhua Financial Holding Co., Ltd., Central China Securities Company Limited,
China New City Commercial Development Limited, China Shengmu Organic Milk Limited, Broad Greenstate International Company Limited, China
National Culture Group Limited, Sichuan Development Holding Co. Ltd., Austar Lifesciences Limited and BAIC Motor Corporation Limited within
the preceding 12 months.
BOCOM International Holdings Company Limited currently holds more than 1% of the equity securities of Shanghai Fosun Pharmaceuticals Group
Co. Ltd.
BOCOM International Securities Limited currently holds more than 1% of the equity securities of Sanmenxia Tianyuan Aluminum Company Limited.
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