Sino Biopharmaceutical Ltd (1177 HK) – Softer core profits excluding vaccine income
• FY21 net profit beat expectations driven by higher vaccine income from Sinovac.
• Underlying profit excluding vaccine income gained a more modest 27% year-on-year (YoY) as expenses increased.
• No special dividends is a disappointment. Firm intends to invest further in research and development focusing on their innovative pipeline.
• Fair value is reduced to HKD6.50, with less vaccine income expected ahead.
FY21 net profit of CNY14.6b beat expectations driven by vaccine income where the firm’s share of associate profit from Sinovac surged to CNY13.6b, which should moderate this year.
Underlying profit excluding vaccine income increased 27% YoY, weighed by higher selling and other expenses that included research and development costs.
By segments, full year revenue growth rates of its key segments were as follows: respiratory 44%, cardiovascular 43%, oncology 21%, orthopedic 17%, hepatitis -2%. In terms of proportion of total revenue, oncology segment was the largest contributor, making up 34% of total revenue (up from FY20’s
32.2%) while hepatitis segment which reported top line contraction made up 14% of group top line (vs
FY20’s 15.9%) weighed by GPO impact from China’s ongoing healthcare reform. The firm grew
its percentage of innovative drugs to 24% in 2021.
2H21 revenues of CNY12.5b grew 14% YoY, below expectations partly due to hepatitis drugs sales that
came in softer at CNY1.7b which represented a decline of 16%. Oncology sales of CNY4.2b for 2H21
was on the softer side due to weaker growth from Anlotinib. Gross profit margin and operating profit
margin came in at 79.4% and 13.7%, moderated by one off adjustments to asset and liabilities impairment booked of CNY961m. 2H21 net profit of CNY7b was lifted by share of vaccine related income from associate Sinovac, which contributed CNY7b.
The firm will not pay out a special dividend despite the higher profits from the Sinovac investments, deciding instead to invest in their research and development pipeline to strengthen the oncology segment. With some key drugs entering phase III this year (such as TQB2450-PD-L1, TQB3139-ALK, TWB3101-ROS-1), this could support the medium-term outlook of the firm.
On the 2022 outlook, the firm guided for CNY1-1.2b in sales for PD-1 drug and hopes to get two more
new indications approved in 2022. With a quarter of its drug portfolio already entered the group
purchasing organization (GPO) programme, management anticipates a further 20% of its portfolio may gradually enter the programme. It may also participate in the national reimbursement drug list (NRDL) negotiation this year if non-small cell lung cancer (NSCLC) treatment is approved in time. Anlotinib sales is likely to grow 10% well US new drug application (NDA) filing for soft tissue sarcoma is expected this year. Biosimlars will continue to contribute to revenue growth, with more expected to be approved this year (bevacizumab/ rituximab/trastuzumab). For 2023, potential new drug approvals are guided to likely include TWB2450 (PD-1), F-627 (G-CSF), TQB3139 (ALK/c-Met) and TWB3101 (ALK/c-Met/ROS1).
Fair value is reduced to HKD6.50 which implies 15.5x FY22 price-to-earnings ratio. We have adjusted our
forecasts to reflect higher research and development expenses as the firm focuses on its innovative drug pipeline, a more moderate pace of ramp up expected for oncology drugs and continued GPO pricing pressures in hepatitis drugs. We also believe the contribution from vaccine income should moderate from this year onwards, as the pandemic situation should gradually normalize over the course of the year. The firm has guided for about 10 innovative drugs which may be approved over the course of 2022-2024. Key
focus ahead will be on research and development work as well as active business development and improving the coordination of its research centres.
Highlights of management’s previous update in 2021: Guidance of a double digit compound annual growth rate (CAGR) revenue growth over the next three years was reiterated, which is expected to be driven by the launch of about 100+ drugs across a broader pipeline of both generics and biosimilars, as well as innovate drugs with better commercial potential. Over the long term, management targets for over USD10b revenue by 2030 (which implies 30%+ CAGR), with half from exChina market and 80% from innovative products (including half from biologics). There will be four key platforms set up, which will be categorized as follows: generics, innovation (x-lab: to shift over time from me-too strategy to grow potential first or best in class product offering), ecosystem (growing via external business development and investments to explore opportunities) and lastly ESG.
ESG Updates
SBP is rated for its ESG performance in October 2021 review of the company, which pegs the firm in
line with global sector peers’ average rating. The upgrade was driven by improvements observed in
its corporate governance (in particular its board practices) and talent management initiatives. The
annual incentive programme for executives is also aligned with the company’s annual performance.
Sino Biopharmaceutical’s product quality performance appears on par with peers, with related programs including certification to ISO 9001 standards and research not detecting any evidence of significant product recall or regulatory warning letters over the past three years (as of May 2021). The firm also has in place anti-corruption policies and measures to mitigate ethics-related risk. BUY. (Research Team)