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Company Report May 28, 2015 Hanmi Pharm (128940 KS) Diabetes and lung cancer drug pipeline Shares surge on license-out contract with Eli Lilly Pharma/bio BUY (M) TP: W500,000 (U) Hanmi Pharm shares surged after the company signed a contract on Mar 19 with Eli Lilly to license out its oral Bruton's tyrosine kinase (BTK) inhibitor, HM71224. The amount and timing of milestone payments as well how they will be shared between Hanmi Pharm and Hanmi Science (holding company) has not been disclosed. Share price (won, May 15) 427,000 Paid-in capital (Wbn) 26 Market cap (Wbn) 4,369 BPS (won) Reborn as new drug developer after six years of bold R&D investment in the 2000s and has made bold investments since 2009, although the firm saw an operating 57,128 38.6 loss in 2010 after investing more than 13% of sales in R&D. In particular, since 2013, R&D 10,230,909 spending has amounted to 20% of sales, most of which has been spent on developing bio Net debt to equity (%) Shares outstanding Hanmi Pharm is Korea’s leading generic drug maker. It benefited from the generic drug boom 73 drugs and their overseas clinical trials. We expect these efforts to lead to more global Avg daily vol (2M, shrs) 280,514 partnerships in line with the recent trend of licensing deals between multinational pharma firms. 52-week high (won) 428,000 52-week low (won) 76,712 Avg daily T/O (2M, Wbn) Foreign ownership (%) 7.2 Emergence of basal insulin/GLP-1 analog combination treatment Major shareholders (%) LAPS Insulin combo) is a diabetes treatment based on its Long-Acting Protein/Peptide Discovery (LAPSCOVERY), a Hanmi Science & others 41.4 platform technology that prolongs the duration of drug effects and maximizes treatment effects. At the upcoming conference of the American Diabetes Association (ADA) from Jun 5~9, the Stock performance (%) 1M 3M 12M Absolute 44.5 304.7 272.9 Relative 45.4 276.1 255.9 Abs (US$) 46.0 309.0 252.2 (%) (won) 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 May-13 The company’s “Quantum Project” (an efpeglenatide, HM12470, and company is set to disclose the clinical/non-clinical trial results of its four diabetes treatment projects and is likely to sign more license-out contracts with other global pharmas by end-2015. Third-generation lung cancer treatment HM61713 Around the globe, third-generation EGFR-TKIs (lung cancer drugs), are being developed, 300 including AZD9291 (AstraZeneca), CO-1686 (Clovis Oncology), and HM61713 (Hanmi Pharm). 250 Hanmi Pharm is scheduled to announce the Phase II domestic clinical trial results of HM61713 200 at the conference of the American Society of Clinical Oncology (ASCO) to be held from May 29 150 to Jun 2, and is also expecting a license-out contract for HM61713. 100 50 0 May-15 May-14 Hanmi Pharm(LHS) Rel. to KOSPI(RHS) Quarterly earnings Forecasts and valuations (K-IFRS, separate) 1Q15E % YoY 215 16.6 1.5 195 10.2 2 -88.6 -69.9 12 -83.1 Pre-tax profit 16 -2.7 15.1 12 Net profit 16 12.3 28.9 Op margin (%) 1.0 -8.7 %pt -2.2 %pt (Wbn) Sales Operating profit Net margin (%) 7.5 -0.3 %pt % QoQ Consens vs consens (%) +1.6 %pt Note: TTB = turn to black, TTR = turn to red, RR = remain in red Source: Yuanta Securities FY ends Dec (Wbn) 2013A 2014A 2015E 2016E 730 761 876 880 Operating profit 62 34 78 72 32.7 Net profit, CI 44 36 65 50 10 67.8 % YoY 94.1 -19.2 82.6 -22.4 6.2 -5.2 %pt P/E (x) 27.4 28.7 67.4 86.8 +2.5 %pt P/B (x) 2.9 1.9 7.5 7.0 EV/EBITDA (x) 16.0 20.5 44.1 45.0 ROE (%) 11.4 7.6 11.7 8.4 5.0 Sales Note: Operating profit = gross profit – SG&A expense, CI = controlling interest Source: Yuanta Securities Hanmi Pharm (128940 KS) Enterprise value surges on license-out contract with Eli Lilly Hanmi Pharm shares surged after the company signed a contract with Eli Lilly on March 19 to license out its oral Bruton's tyrosine kinase (BTK) inhibitor, HM71224. The amount and timing of milestone payments as well as how they will be shared between Hanmi Pharm and Hanmi Science (holding company) has not been disclosed. Our assumptions for the upfront and milestone payments of the license-out contract with Lilly are shown below: License-out contract for HM71224, BTK inhibitor Details Contract announced on Mar 19, 2015 Contract content Clinical trials and commercialization Region: world excluding Korea and China License for all indications including immunological disorders including rheumatoid arthritis Contract signed with Eli Lilly Contract value $690mn Down payment: $50mn Milestone payment: $640mn (development, approval, sales, etc) Royalties (double digits) HM71224 Selective BTK (Bruton’s tyrosine kinase) inhibitor 2010: Initiated development of a novel BTK inhibitor for treatment of rheumatoid arthritis 2010: Selected as healthcare/medicine technology development project by Korea’s Ministry of Health and Welfare 2013~2014: Phase I in Europe 2014: Presented at EULAR Eli Lilly 10th-largest global pharma, established in 1876 (operating in 21 countries) Introduced world’s first commercial insulin in 1923 Began to mass-produce penicillin for first time in 1943 Major products: “Cymbalta” (anti-depressant), “Evista” (osteoporosis), “Zyprexa” (schizophrenia) Erectile dysfunction treatment “Cialis,” diabetes treatments “Trulicity,” “Jardiance” 2014 sales came to $19.6bn and net profit $2.3bn Source: Yuanta Securities Hanmi-Lilly alliance: Milestone payment estimate 2015E Upfront 30.0 Initiation of Phase II 12.0 Completion of Phase II ($mn) 2016E 2017E 2018E 16.8 Initiation of Phase III 19.2 Completion of Phase III 36.0 NDA submission 24.0 NDA approval Total milestone payments Source: Yuanta Securities 2 2019E 60.0 42.0 16.8 19.2 60.0 60.0 Company Report What are BTK inhibitors? BTK inhibitors are already being developed to treat B-cell malignancies, and are known to be effective in other B-cell related autoimmune disorders. Ibrutinib, marketed under the name “Imbruvica” by Pharmacyclics, is the blockbuster BTK inhibitor for oncology treatment. The drug, first approved by the FDA in Nov 2013 for the treatment of mantle cell lymphoma, has now gained approval for four indications including chronic lymphocytic leukemia. Lymphoma, a type of cancer that occurs in the lymph, can be treated, but some types of lymphoma do not respond to treatment. In 2006, Pharmacyclics acquired the license for Imbruvica for $6.6mn, and entered a large-scale agreement (upfront payment of $150mn and milestone payments of $825mn) with Janssen Biotech (a subsidiary of Johnson & Johnson) in Dec 2011 on the co-development and marketing of Imbruvica (then in Phase II clinical trials). The two companies split profits from global Imbruvica sales 50:50, while Pharmacyclics continues to hold the license for inflammation and autoimmune disorders. After fierce competition with other multinational pharmas, on Mar 5 AbbVie signed an agreement to acquire Pharmacyclics for $21bn. Global sales of Imbruvica (released in Dec 2013) in 1Q15 came to $247mn, and AbbVie suggested a rather aggressive guidance for Imbruvica’s 2015 full-year sales of $7bn. Pharmacyclics share performance and P/E band (12-month forward) (US$) price 100x 150x 200x 250x 300x 400 350 300 250 200 150 100 50 0 2006 2008 2010 2012 2014 Source: Yuanta Securities 3 Hanmi Pharm (128940 KS) Reborn as new drug developer after six years of bold R&D investment Hanmi Pharm is Korea’s leading generic drug maker. The firm benefited from the generic drug boom of the 2000s and has made bold investments since 2009, even though it saw an operating loss in 2010 after investing more than 13% of its sales in R&D. In particular, since 2013, R&D spending has amounted to 20% of sales, most of which has been used in developing bio drugs and their overseas clinical trials. We expect these efforts to lead to more global partnerships, in line with the recent trend of licensing deals between multinational pharmaceutical firms. Hanmi Pharm: R&D investments (K-IFRS, separate) Hanmi Pharm: share ownership (% of sales) Lim Seong-gi (36.16%) and related parties 30% 67.78% 25% Hanmi Science 20% 100% 15% 100% 10% 98.57% 5% Japan Hanmi Pharm Europe Hanmi Pharm 63.00% 75% 0% 2003 2005 2007 2009 2011 Online Pharm 41.37% 2013 Note: The company was listed in Jul 2010 after spin-off; K-IFRS was introduced in 2011 Source: Yuanta Securities Eremurus Hanmi Fine Chemical Hanmi Pharm 73.68% Beijing Hanmi Pharm Note: As of Dec 31, 2014 Source: Yuanta Securities Hanmi Pharm: earnings forecast (K-IFRS, separate) Total sales (consolidated) % YoY (Wbn) 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 512.5 543.8 562.8 582.0 682.0 674.2 693.5 755.0 772.0 -14 6 3 3 Total sales without Lilly Alliance % YoY 17 -1 3 9 2 635.8 655.7 672.4 689.0 706.0 9.2 3.1 2.5 2.5 2.5 1.7 21.2 34.5 3.6 40.9 32.4 26.9 42.3 48.0 -107.7 1147.1 62.7 -89.6 1035 -21 -17 57 13 0.3 3.9 6.1 0.6 6.0 4.8 3.9 5.6 6.2 Non-op profit/loss -13.5 -15.5 -7.7 0.5 6.0 -7.0 -7.0 -7.0 -7.0 Recurring profit -11.8 5.7 26.8 4.1 46.85 25.4 19.9 35.3 41.0 -3.7 -1.3 0.8 -11.5 1.2 -0.5 2.1 13.0 16.0 NA NA 3.0 NA NA NA NA NA NA Net profit -8.1 7.0 26.0 15.6 45.7 25.9 17.8 22.4 25.0 % YoY -63.2 -186.4 271.4 -40.0 193 -43 -31 26 12 -1.6 1.3 4.6 2.7 6.7 3.8 2.6 3.0 3.2 Operating profit % YoY Operating margin (%) Tax Tax rate (%) Net margin (%) Source: Yuanta Securities 4 Company Report Hanmi Pharm: earnings forecast (K-IFRS, consolidated) Total sales (consolidated) % YoY (Wbn) 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 606.2 674.0 730.1 761.3 875.9 879.8 909.3 981.1 1,007.7 79.6 11.2 8.3 4.3 15.1 0.4 3.3 7.9 2.7 829.7 861.4 888.2 915.1 941.7 9.0 3.8 3.1 3.0 2.9 Total sales without Lilly Alliance % YoY COGS 271.9 279.3 313.7 338.8 367.9 382.7 395.5 436.6 418.2 44.9 41.4 43.0 44.5 42.0 43.5 43.5 44.5 41.5 Gross profit 334.3 394.7 416.5 422.5 508.0 497.1 513.8 544.5 589.5 SG&A expense 313.1 346.5 354.6 388.1 430.4 425.6 445.6 458.7 496.0 COGS-to-sales (%) SG&A-to-sales (%) 51.6 51.4 48.6 51.0 49.1 48.4 49.0 46.8 49.2 R&D costs 70.5 80.0 95.0 135.2 135.1 134.2 134.4 134.4 134.1 11.6 11.9 13.0 17.8 15.4 15.2 14.8 13.7 13.3 R&D-to-sales (%) R&D costs booked as SG&A *Total R&D costs Total R&D-to-sales without alliances Operating profit 83.9 87.9 82.2 88.7 89.0 89.0 89.0 89.0 89.0 84.0 91.0 115.6 152.5 151.8 150.7 151.0 151.0 150.7 13.9 13.5 15.8 20.0 18.3 17.5 17.0 16.5 16.0 21.2 48.1 61.9 34.5 77.6 71.5 68.1 85.8 93.5 % YoY Operating margin (%) Non-op profit/loss Recurring profit Tax Tax rate (%) 126.9 28.7 -44.3 125.0 -7.9 -4.7 25.9 8.9 3.5 7.1 8.5 4.5 8.9 8.1 7.5 8.7 9.3 -14.7 -15.9 -7.1 2.0 6.0 -7.0 -7.0 -7.0 -7.0 6.5 32.2 54.8 36.5 83.6 64.5 61.1 78.8 86.5 1.1 3.4 4.3 -6.8 4.6 3.1 5.9 17.0 20.2 NA NA 7.8 NA 5.5 4.8 9.7 21.6 23.3 Net profit 5.4 28.8 50.5 43.3 79.1 61.4 55.2 61.8 66.3 % YoY -147.8 433.3 75.3 -14.3 82.6 -22.3 -10.1 12.0 7.2 0.9 4.3 6.9 5.7 9.0 7.0 6.1 6.3 6.6 1.3 22.6 43.9 35.5 69.7 51.5 44.8 50.8 54.8 Sales 80.9 81.2 86.0 90.7 94.3 97.1 99.1 101.1 103.1 % YoY -16.8 0.3 6.0 5.4 4.0 3.0 2.0 2.0 2.0 Net margin (%) Net profit for controlling interest Hanmi Fine Chemical (63%-owned) Operating profit % YoY Operating margin (%) 3.8 6.1 0.0 5.3 5.7 5.8 5.9 6.1 6.2 -48.5 62.1 NA NA 5.8 3.0 2.0 2.0 2.0 4.7 7.5 NA 5.9 6.0 6.0 6.0 6.0 6.0 Net profit 0.5 4.8 1.0 4.9 5.2 5.3 5.4 5.6 5.7 % YoY -89.5 923.1 -79.2 389.5 6.0 3.0 2.0 2.0 2.0 0.6 5.9 1.2 5.4 5.5 5.5 5.5 5.5 5.5 Sales 99.0 138.1 171.0 172.8 194.5 208.1 220.6 233.9 245.6 % YoY 22.7 39.4 23.8 1 12.6 7.0 6.0 6.0 5.0 Operating profit 16.2 20.4 27.0 25.6 31.1 33.3 35.3 37.4 39.3 8.8 25.7 32.6 -5 21.6 7.0 6.0 6.0 5.0 Net margin (%) Beijing Hanmi Pharmaceutical (73.68%-owned) % YoY 16.4 14.7 15.8 15 16 16 16 16 16 Net profit Operating margin (%) 13.2 16.7 23.0 23.2 28.2 30.2 32.0 33.9 35.6 % YoY 10.4 26.6 38.1 1 21.7 7.0 6.0 6.0 5.0 Net margin (%) 13.3 12.1 13.5 13.4 14.5 14.5 14.5 14.5 14.5 Source: Yuanta Securities 5 Hanmi Pharm (128940 KS) Focused on diabetes and cancer treatments The company’s Quantum Project (an efpeglenatide, HM12470, and LAPS Insulin combo) is a diabetes treatment based on its Long-acting Protein/Peptide Discovery (LAPSCOVERY), a platform technology that prolongs the duration of drug effects and maximizes treatment effects. At the upcoming conference of the American Diabetes Association (ADA) from June 5 to 9, the company is set to disclose the clinical/non-clinical trial results of its four diabetes treatment projects and is likely to sign more license-out contracts with other global pharmas by end-2015. Hanmi Pharm also has an extensive oncology drug pipeline including HM61713, a third-generation EGFR mutant-selective inhibitor (EMSI), which overcame the resistance problem of firstgeneration anti-lung cancer drugs “Iressa” and “Tarceva.” The company is scheduled to announce the Phase II domestic clinical trial results of HM61713 at the conference of the American Society of Clinical Oncology (ASCO) to be held from May 29 to Jun 2, and is also expecting a license-out contract for HM61713. Hanmi Pharm: R&D pipeline (1Q15) Source: Yuanta Securities 6 Company Report Hanmi Pharm: LAPSCOVERY Source: Yuanta Securities Hanmi Pharm: bio drug development Source: Yuanta Securities 7 Hanmi Pharm (128940 KS) GLP-1 analog gains attention as effective diabetes treatment How to treat people with type 2 diabetes depends on the ability of their β-cells to secrete insulin. Typically, injections of insulin are needed to control glucose levels. Glucagon-like peptide-1 (GLP-1), a hormone secreted in response to the presence of nutrients, reduces the secretion of glucagon, thereby lowering glucose levels. In particular, as GLP-1 causes glucose-dependent stimulation of insulin secretion, it does not stimulate insulin secretion when glucose levels are normal, and thus does not cause hypoglycemia. In addition, GLP-1 inhibits food intake and delays carbohydrate absorption. GLP-1 is decomposed quickly by dipeptidyl peptidaseIV (DPP-IV) enzymes and GLP-1 has a half-life of only two minutes. GLP-1 analogs or GLP-1 receptor agonists work similarly to GLP-1, reducing glycated hemoglobin (HbA1C) by about 1.0%. (Medical professionals measure HbA1C to get an overall picture of average blood sugar levels over a period of weeks/months). They are injectable drugs and normally prescribed for patients who have not been able to control their conditions with tablet medicine. They preserve and improve pancreatic β cells and can also be accompanied by weight loss of 1.5~3.0kg, enhancing their clinical utility. Thirty to forty percent of patients experience nausea and vomiting, but the intensity of these side effects is greatly reduced in two to four weeks. Insulin secretion ability of people with type 2 diabetes and recommended therapies Mechanism of action of GLP-1 + GLP-1 Insulin - + Glucagon - Half Life < 2min DPP-IV Source: Yuanta Securities 8 Source: Yuanta Securities Glucose Company Report Emergence of “basal insulin and GLP-1 analog combination treatment” Basal insulin is injected once a day to manage fasting glucose levels, while fast-acting mealtime insulin is injected three times a day 30 minutes before meals. In other words, basal insulin is good at controlling fasting glucose levels and has a lower risk of hypoglycemia (side effect) than other types of insulin. War on diabetes, the silent disease Recently, a combo treatment of basal insulin (injected once a day to control fasting glucose) and GLP-1 analog (injected once a day to control post-meal glucose levels) has gained attention. In addition, once-a-week injectable basal insulin and GLP-1 analog are under development, and Novo Nordisk is developing an oral version of GLP-1 analog (semaglutide, in Phase II clinical trial). The insulin market is led by Sanofi, Novo Nordisk, and Eli Lilly. In particular, Sanofi takes up a high portion of the insulin market with “Lantus” (2014 sales of $10.3bn), whose patent has expired in the US and Europe. Novo Nordisk, focused on diabetes drugs, has a 71% share of the GLP-1 analog market (by value) with “Victoza” (2014 sales of $2.4bn). At Novo Nordisk, diabetes drugs generate 78.8% of total sales, with insulin representing 58.4% of total sales. Major insulin makers: 2005~2014 insulin sales CAGR Source: Yuanta Securities Novo Nordisk: share performance and P/E band (12-month forward) (DKK) price 12x 17x 22x 27x 32x 500 400 300 200 100 0 2006 2008 2010 2012 2014 Source: Yuanta Securities 9 Hanmi Pharm (128940 KS) Competition among basal insulins and GLP-1 analogs Daily Combo LixiLan [N] Weekly LAPSInsulin Xultophy [M] Combo [Pre] Trulicity [M] Victoza [M] GLP-1 Lyxumia [M] Byetta [M] Toujeo [M] Tresiba [M] MK-1293 [P3] Basaglar [M] Insulin Semaglutide [Inj. P3, Oral P2] efpeglenatide [P2] Tanzeum [M] Bydureon [M] LAI287 [P1] HM12470 [P1] * Pre: Preclinical, P: Phase, N: NDA filed, A: Approved, M: Marketed Source: Yuanta Securities Basal insulin and GLP-1 analogs Combo GLP-1 Product /substance Details Xultophy (Tresiba + Victoza) Approved by the EMA in Sep 2014, to be launched in 1H15; combo with oral diabetes drugs; second line therapy LixiLan (Lantus + Lyxumia) In Phase III clinical trials; able to file for FDA approval at end- 2015; likely to be launched in 2017 Weekly LAPS Pre-clinical Daily Byetta (Exenatide, 2 injections/day) AstraZeneca bought license from Lilly in 2011 Daily Insulin Combo Victoza (liraglutide) Approved by EMA in 2009 and FDA in 2010 (0.75mn, 1.5mg); recently, its efficacy as complete treatment for fatty liver proven (39% of people injected with Victoza recovered) Under name Saxenda (3mg) approved by FDA in Dec 2014 as obesity treatment for those with more than one complication Lyxumia (lixisenatide) Approved by FDA in 2013; US application for marketing approval withdrawn in 2014 due to increased cardiovascular risk Long-term cardiovascular safety data (non-inferior) to be released in Jun 2015 Symptomatic hypoglycemia expressed more often than Victoza Weekly Bydureon (exenatide ER) AstraZeneca bought license from Lilly in 2011; compared to Byetta, it has improved ability to lower glucose levels and body weight, with less side effects Tanzeum (albigluitde) Approved in Europe in Mar 2014 and the US in Apr 2014; lowers HbA1C by up to 1.0%; 30~50mg injected; little reduction in body-weight Trulicity (dulaglutide) Approved by FDA in Sep 2014 (first approval); lowers HbA1c by more than 1.0%; better at lowering glucose levels than Byetta, Lantus, and Januvia Semaglutide Injection version (once-a-week) began Phase III-a trials in Dec 2014 Oral version (once-a-day) Phase II study results positive; oral version contains SNAC, an absorption-enhancing excipient; oral version has little weight loss effect; high doses of oral Semaglutide carry higher risk of adverse events on gastrointestinal system Insulin Daily efpeglenatide Two-month injection reduced HbA1C by about 1.0%; nausea and vomiting similar to placebos Toujeo (insulin glargine) Low risk of hypoglycemia (additional clinical trial needed); dosage triple that of Lantus Tresiba (insulin degludec) Approved in Europe; applied for FDA approval in Apr 2015 based on preliminary results of cardiovascular risk study; may be approved in October Basaglar (Lantus Biosimilar) Co-developed with Boehringer Ingelheim; Europe’s first insulin biosimilar (approved in Sep 2014); weight loss effects stronger than Lantus Weekly Source: Yuanta Securities 10 MK-1293 (Lantus Biosimilar) In Phase III study; likely to apply for approval in 2015-2016; to co-develop with Samsung Bioepis LAI287 In Phase I clinical trial; likely to be launched after 2020. Oral Insulin’s Phase II clinical trials to be decided in 2015. HM12470 In Phase I clinical trial Company Report HM61713, third-generation lung cancer drug Lung cancer is one of the most common cancers and the most common cause of cancer-related deaths for both male and females (mortality rate: 11~15%). Excluding small cell carcinoma, clinical trial prognoses of and patient responses to non-small-cell lung cancers (NSCLCs) are similar. NSCLCs include adenocarcinoma, squamous cell carcinoma, and large cell carcinoma and account for 80-85% of total lung cancer patients. Epidermal growth factor receptor (EGFR) is a gene which regulates the amplification and death of cells. Cancers are the result of mutations and over-activation of EGFR. This is the most typical gene mutation found in NSCLCs. Treatments have been developed to inhibit over-expression or over-activation of EGFR such as first-generation EGFR inhibitors (EGFR-TKIs, epidermal growth factor receptor-tyrosine kinase inhibitors) “Tarceva” (erlotinib) and “Iressa” (gefitinib), and a monoclonal antibody “Erbitux” (cetuximab), which targets EGFRs. For the past decade, first-generation EGFR inhibitors (EGFR-TKIs) helped improve the lifespan of progressive NSCLC patients with dramatic improvements in prognoses and user convenience (oral administration). However, patients treated with EGFR-TKIs grew resistant to the drug and their conditions worsened in the end. It was later found that administration of EGFR-TKIs led to a secondary mutation, EGFR T790M. There is no standard treatment that is effective for EGFR-TKI resistance. Although second-generation EGFR-TKIs—known as irreversible pan-HER (human epidermal growth factor receptor) inhibitors—such as “Afatinib” were developed, non-selective wild-type EGFR inhibition-related toxicity made it difficult for them to be used alone for NSCLCs. Administered together with Erbitux (cetuximab), 29% of EGFR-TKI resistant patients responded to Afatinib, but this too was accompanied by serious adverse effects on the skin and digestive system due to wild-type EGFR inhibition. Third-generation EGFR-KTIs, such as AZD9291 (AstraZeneca), CO-1686 (Clovis Oncology), and HM61713 (Hanmi Pharmaceutical) are being developed. These orally administered drugs are mutant selective EGFR inhibitors which suppress T790M and classic EGFR mutations while not affecting wild-type EGFRs. Response rates among T790M-positive tumor patients to AZD9291 (AstraZeneca) and CO-1686 (Clovis Oncology) were high, but CO-1686 had a high rate of causing hyperglycemia and QTc interval elongation (increasing the risk of irregular heartbeat, known as arrhythmia). According to the clinical trial results released in Apr 2015, AZD9291 delays the progression of lung cancer by more than a year (mPFS 13.5 months) and AstraZeneca plans to file for sales approval with the US FDA in 2Q15. The firm estimates that AZD9291 sales will exceed $3bn per year. Clovis Oncology (US) is a bio venture founded by the management of Pharmion. Pharmion was sold for $2.9bn to Celgene in 2007. Clovis Oncology secured $145mn from investors upon its foundation in 2010 even with an empty drug pipeline. It is currently working on three anticancer drugs (all in Phase II clinical trials) including CO-1686. It has yet to generate any profit but its market capitalization is already $2.8bn. The firm plans to file for sales approval of CO-1686 (rociletinib) with the US FDA in Jun 2015. 11 Hanmi Pharm (128940 KS) At the upcoming conference of the American Society of Clinical Oncology (ASCO) scheduled for May 29~Jun 2, Hanmi Pharm is set to disclose the Korean Phase II clinical trial results for HM61713 and is likely to sign license-out contracts with other global pharmas in the future. Comparison of third-generation EGFR-TKIs Note: mPFS = median progression free survival, ILD = interstitial lung disease, SOB = shortness of breath Source: 2014/6 ASCO, Yuanta Securities Clovis Oncology: share performance (US$) 100 80 60 40 20 0 2012 Source: Yuanta Securities 12 2013 2014 2015 Company Report Hanmi Pharm valuation To assess the enterprise value of Hanmi Pharm, we estimated the value of its most promising pipeline, Efpeglenatide (diabetes treatment) and HM61713 (lung cancer). 1) Estimated value of Efpeglenatide (diabetes treatment) To estimate annual sales and the value of a licensing deal for Efpeglenatide we referred to sales of GLP-1 analogues that are already available in the market, “Byetta,” “Bydureon,” and “Victoza.” Hanmi Pharm may manufacture and distribute Efpeglenatide itself when it is commercialized, but for forecasting purposes, we assumed it would license it out, and accounted for milestone payments and royalty revenues only. We also assumed that 70% of licensing-out relevant revenues would flow into Hanmi Pharm. GLP-1 analogue sales ($mn) Pharma Byetta 2007 2008 2009 2010 2011 2012 2013 2014 Total 14 73 129 151 163 233 206 327 Lilly 14 73 129 151 163 159 74 206 327 151 440 AstraZeneca Bydureon Total 4 67 Lilly 4 30 37 151 440 1,120 1,640 2,072 2,392 AstraZeneca Victoza Novo Nordisk 16 413 Note: Lilly purchased licenses for Byetta and Bydureon from AstraZeneca in 2011 Efpeglenatide alliance forecast ($mn) 2015E Upfront payment 80 Development milestone payments 30 2016E 2017E 2018E 2019E 50 70 Year 3 Year 4 Year 5 Year 6 400 1,000 1,700 2,000 2,400 2,700 50 100 150 150 200 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 110 50 70 100 - 50 100 150 150 200 400 1,000 1,700 2,000 2,400 2,700 50 100 150 150 200 40 100 170 200 240 270 Royalty 110 % YoY 50 70 100 40 150 270 350 390 470 40.0 42.9 -60.0 275.0 80.0 29.6 11.4 20.5 10 15 16 18 16 17 2019E 2020E 2015E 2016E 2017E 2018E 85 39 54 77 Efpeglenatide sales Sales milestone Royalty 85 39 54 77 - 39 308 770 - 39 31 77 31 154 650 2024E CAGR ('19~'24) -54.5 % of Efpeglenatide sales Total sales related to alliances Total 250 Year 2 Sales milestone Total milestone payment 2024E 2015E Efpeglenatide sales (Wbn) 2023E Year 1 Sales milestone payment Total sales related to alliances 2022E 100 Efpeglenatide sales Total milestone payment 2021E 80 ($mn) ($mn) 2020E 63.7 Note: Assuming KRW/USD at W1,100, Source: Yuanta Securities 13 Hanmi Pharm (128940 KS) Efpeglenatide value estimation (free cash flow discount model) NOPLAT Depreciation & amortization (Wbn) 2015E 2016E 2017E 2018E 2019E 2020E 85 39 54 77 31 154 0 0 0 0 0 0 85 39 54 77 31 154 Working capital increase 0 0 0 0 0 0 Capex 0 0 0 0 0 0 Total investment 0 0 0 0 0 0 85 39 54 77 31 154 PVIF 1.00 0.94 0.88 0.83 0.77 0.73 PV of FCF 84.7 36.1 47.4 63.6 23.9 111.9 Free cash Free cash flow Terminal value WACC Beta 1.1 Terminal growth (%) 0.0 Rf 1.9 WACC 6.6 Risk premium 6.0 Dividend yield (%) 0.0 Re 8.5 We 0.7 Wd 0.3 Re 8.5 Rd 4.0 WACC 6.6 PV of FCF 20.0 368 PV of continuing value 1,909 Sum 2,277 Net debt Equity value Shares outstanding ('000) Fair price (calculated) Source: Yuanta Securities 14 185 0.68 0.68 2,801 Share price calculation FCF growth (normalized, %) Continuing 2,277 10,231 222,548 Company Report 2) Estimated value of HM61713 (cancer treatment) To estimate annual sales and the value of a licensing deal for HM61713, we referred to sales of first-generation EGFR-TKIs already available in the market—Iressa and Tarceva. Hanmi Pharm may manufacture and distribute Efpeglenatide itself when it is commercialized, but for forecast purposes, we assumed that it would license it out and accounted for milestone payments and royalty revenues only. We also assumed 70% of licensing-out relevant revenues would flow into Hanmi Pharm. First-generation EGFR-TKIs sales Pharma Iressa AstraZeneca Tarceva Roche ($mn) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 67 228 389 273 237 238 265 297 393 554 611 647 311 649 886 1,125 1,205 1,275 1,416 1,402 1,445 Source: Yuanta Securities HM61713 alliance forecast ($mn) 2015E Upfront payment 30 Development milestone payments 20 2016E 2017E 2018E 30 40 50 2019E 2020E Efpeglenatide sales Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 200 400 600 800 1,000 1,200 50 50 100 100 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 50 30 40 50 - - 50 50 100 100 200 400 600 800 1,000 1,200 50 50 100 100 Sales milestone Royalty 50 % YoY Total milestone payment 30 60 90 120 150 180 40 50 30 60 140 170 250 280 -40.0 33.3 25.0 -40.0 100.0 133.3 21.4 47.1 12.0 15 15 23 21 25 23 2015E 2016E 2017E 2018E 2019E 2020E 39 23 31 39 - - 154 308 Efpeglenatide sales Sales milestone Royalty Total sales related to alliances 39 Total 23 31 39 - - 23 46 23 46 300 2024E CAGR ('19~'24) 30 % of Efpeglenatide sales (Wbn) 2024E 2015E Efpeglenatide sales Total sales related to alliances 2023E 140 Sales milestone payment Total milestone payment 2022E 30 ($mn) ($mn) 2021E 56.3 Note: Assuming KRW/USD at W1,100, Source: Yuanta Securities 15 Hanmi Pharm (128940 KS) HM61713 value estimate (free cash flow discount model) NOPLAT Depreciation & amortization (Wbn) 2015E 2016E 2017E 2018E 2019E 2020E 39 23 31 39 23 46 0 0 0 0 0 0 39 23 31 39 23 46 Working capital increase 0 0 0 0 0 0 Capex 0 0 0 0 0 0 Total investment 0 0 0 0 0 0 39 23 31 39 23 46 PVIF 1.00 0.94 0.88 0.83 0.77 0.73 PV of FCF 38.5 21.7 27.1 31.8 17.9 33.6 Free cash Free cash flow Terminal value WACC Beta 1.1 Terminal growth (%) 0.0 Rf 1.9 WACC 6.6 Risk Premium 6.0 Dividend Yield (%) 0.0 20.0 Re 8.5 We 0.7 Wd 0.3 Re 8.5 Rd 4.0 WACC 6.6 PV of FCF 171 PV of continuing value 573 Sum 743 Net debt Equity value 16 743 Shares outstanding ('000) 10,231 Fair price (calculated) 72,653 Source: Yuanta Securities 55 0.68 0.68 840 Share price calculation FCF growth (normalized, %) Continuing Company Report 3) Hanmi Pharm: valuation We calculated Hanmi Pharm’s fair price based on the sum of its future earnings (including the Eli Lilly licensing-out revenues, target P/E of 40x) and estimated value (FCF discount model) of Efpeglenatide (diabetes treatment) and HM61713 (lung cancer treatment). We reiterate BUY and revise up our target price to W500,000. However, details of the Eli Lilly licensing-out contract have yet to be disclosed and it is hard to assess the value of future licensing deals precisely. Although it is not easy to estimate the exact value of a drug in a pipeline, which is a key determinant of a pharma’s enterprise value, we believe the commercial values of Efpeglenatide and HM61713 are high given their product profiles. Morgan Stanley Capital International announced on May 13 that AmorePacific (preferred) and Hanmi Pharm would be included in the MSCI Korea Index as of Jun 1, 2015. The MSCI Korea Index is designed to serve as an investment benchmark and its selection of constituents is based on market capitalization and current ratio. When a stock becomes a constituent, it can easily draw the attention of institutional investors and is incorporated into relevant index funds. Changes to MSCI index constituents are made four times a year (February, May, August, and November). Unlike in the past, news of inclusion in or exclusion from an MSCI index is not necessarily followed by sharp rise or fall of the relevant stocks. However, given that foreign ownership in Hanmi Pharm is at a mere 7.2% today, foreign demand may increase. Hanmi Pharm: valuation (K-IFRS, consolidated) Sales (Wbn) 2015E 2016E 2017E Total value (Wbn) 876 880 909 Operating profit 78 72 68 Op margin (%) 8.9% 8.1% 7.5% Net prof before income tax 84 65 61 NP 79 61 55 NP for controlling interest EPS (won) Current price (won) P/E Target P/E (x) Avrg. EPS (2015~2017, won) 65 50 45 6,338 4,920 4,423 427,500 427,500 427,500 67 87 97 40 5,227 Value of current earnings per share (won): A 209,080 2,139 Value of Efpeglenatide per share (won): B 222,548 2,277 Value of HM61713 per share (won): C Total equity value per share (won): A+B+C 72,653 743 504,281 5,159 Source: Yuanta Securities 17 Hanmi Pharm (128940 KS) Hanmi Pharm (128940 KS) pro forma financial statements (K-IFRS, separate) Statement of comprehensive income FY ends Dec (Wbn) Statement of financial position 2013A 2014A 2015E 2016E 2017E Sales 730 761 876 880 909 FY ends Dec (Wbn) Cost of sales 314 339 368 383 396 Cash & cash equiv Current assets 2013A 2014A 2015E 2016E 452 538 616 630 2017E 707 69 52 68 79 140 Gross profit 416 423 508 497 514 Accts rec & other 221 290 333 335 346 SG&A 355 388 430 426 446 Inventory 106 133 153 154 159 Operating profit 62 34 78 72 68 Non-current assets 429 496 558 617 605 EBITDA 89 60 106 104 110 Tangible assets 259 328 382 434 418 Non-op profit/loss -7 2 6 -7 -7 0 0 0 0 0 Forex gain/loss 0 1 0 0 0 75 50 50 50 50 Net interest inc Total assets 881 1,033 1,175 1,246 1,312 Current liabilities 234 182 123 61 0 Investment in affiliate Other non-current -12 -8 -10 -10 -9 Equity-meth gain/loss 0 0 0 0 0 Other 5 9 15 3 2 Accts payable & other 93 124 129 131 133 55 36 84 64 61 ST financial liabilities 104 36 -28 -92 -156 4 -7 5 3 6 Liquid LT liabilities 24 11 11 11 11 51 43 79 61 55 Non-current liabilities 184 262 401 490 579 LT financial liabilities Net prof before income tax Income tax Net profit from cont op Net profit from discont op 0 0 0 0 0 12 94 183 272 361 Net profit 51 43 79 61 55 Debentures 139 130 180 180 180 NP for controlling int 44 36 65 50 45 Total liabilities 418 444 524 551 578 Total comprehensive inc 54 33 68 51 44 Equity, controlling int 409 527 583 622 657 TCI for controlling int 47 24 51 38 33 Note: Operating profit calculation same as K-GAAP (sales - COGS - SG&A). Paid-in capital 21 24 26 26 26 Capital surplus 328 419 419 419 419 Retained earnings 50 80 145 195 240 Equity, non-control int 54 62 68 73 77 463 589 651 695 734 Total equity Cash flow statement FY ends Dec (Wbn) Net debt 170 165 225 239 203 Total debt 281 272 347 372 398 2017E Valuation 2013A 2014A 2015E 2016E 2017E 2013A 2014A 2015E 2016E 86 -33 41 86 75 EPS (won) 5,305 3,685 6,338 4,920 4,423 Net profit 51 43 79 61 55 BPS (won) 49,514 54,223 57,051 60,924 64,298 Depreciation & amort 25 23 26 28 36 EBITDA/shr (won) 10,745 6,211 10,322 10,165 10,771 0 -1 0 0 0 SPS (won) 88,168 79,008 85,613 85,994 88,878 DPS (won) Operating cash flow Forex gain/loss FY ends Dec Affiliate invest gain/loss 0 0 0 0 0 Inc(dec) net working cap -2 -94 -72 -14 -28 P/E (x) P/B (x) Other Investing cash flow Investment Inc in tangible assets Dec in tangible assets 12 -4 9 10 12 -38 -69 -91 -91 -31 1 14 0 0 0 -27 -69 -80 -80 -20 0 0 0 67.4 86.8 96.5 2.9 1.9 7.5 7.0 6.6 20.5 44.1 45.0 42.2 1.7 1.3 5.0 5.0 4.8 2013 2014 2015E 2016E 2017E 8.3 4.3 15.1 0.4 3.4 Operating profit (%YoY) 28.6 -44.3 125.2 -7.9 -4.8 PSR (x) 4 1 0 0 0 -15 -11 -11 -11 FY ends Dec -32 85 76 25 25 Sales (% YoY) Inc(dec) in ST fin liab 23 -64 -64 -64 -64 Inc(dec) in LT fin liab Financing cash flow 0 28.7 16.0 EV/EBITDA (x) -17 Other 0 27.4 Key financial data -45 55 139 89 89 NP, CI (%YoY) 94.1 -19.2 82.6 -22.4 -10.1 Inc(dec) in equity 0 94 1 0 0 Gross margin (%) 57.0 55.5 58.0 56.5 56.5 Cash dividend 0 0 0 0 0 Operating margin (%) 8.5 4.5 8.9 8.1 7.5 -10 -1 0 0 0 NP, CI margin (%) 6.0 4.7 7.4 5.7 5.0 12.1 Other Other cash flow Inc (dec) in cash & eq Beginning cash & equiv Ending cash & equiv 2 2 -20 -9 -9 EBITDA margin (%) 12.2 7.9 12.1 11.8 18 -14 6 11 61 ROIC (%) 9.9 6.4 9.5 7.9 6.9 58 76 62 68 79 ROA (%) 5.1 3.7 5.9 4.2 3.5 76 62 68 79 140 ROE (%) 11.4 7.6 11.7 8.4 7.1 NOPLAT 62 41 78 72 68 Debt-to-equity (%) 90.3 75.4 80.5 79.3 78.8 FCF 56 -97 -51 7 55 Net debt-to-equity (%) 41.6 31.3 38.6 38.4 31.0 OP/financing cost (x) 4.2 2.8 5.6 4.8 4.3 Note: EPS, BPS, P/E and P/B are based on controlling interest For valuation metrics such as P/E, historical figures are based on annual averages, estimates on current price For ROA or ROE, assets and equity are averages of end-of-year figures for given year and year prior Data to 2010 based on K-GAAP and from 2011, K-IFRS Source: Yuanta Securities 18 Company Report P/E band chart P/B band chart (W'000) 3,000 (W'000) Price (adj) 11.1 x 112.8 x 214.4 x 316.0 x 417.6 x 2,500 2,000 600 500 400 1,500 300 1,000 200 500 100 0 Jan-08 Jan-11 Jan-14 Jan-17 0 Jan-08 Price (adj) 1.0 x 2.6 x 4.3 x 6.0 x 7.7 x Jan-11 Jan-14 Jan-17 Hanmi Pharm (128940 KS) ratings and target price history Date Rating TP (won) 2015-05-18 BUY 500,000 2015-05-06 BUY 310,000 2015-03-30 BUY 310,000 2015-03-02 BUY 120,000 300,000 2015-01-28 BUY 120,000 200,000 2015-01-14 BUY 120,000 2014-12-22 BUY 97,000 2014-12-01 BUY 97,000 2014-11-28 BUY 97,000 2014-11-20 BUY 97,000 (won) 600,000 500,000 Current Price Target Price 400,000 100,000 0 May-13 Nov-13 May-14 Nov-14 May-15 Source: Yuanta Securities Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Yuanta Securities Korea Co., Ltd. As of the publication date of this report, Yuanta Securities Korea Co., Ltd. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Yuanta Securities Korea Co., Ltd. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Strong Buy, Buy, Hold, Sell) based on the expected absolute return of a stock over the next 6 -12 months. - Strong Buy: Expected to return 30% or more - Buy: Expected to return between 10% and 30% - Hold: Expected to return between -10 and +10% - Sell: Expected to return -10% or less Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting 19 Hanmi Pharm (128940 KS) Yuanta Securities (Korea) International Network Seoul Head Office Yuanta Securities Building Euljiro 76 Jung-gu Seoul, Korea 100-845 Tel: +822 3770 3454 Hong Kong TONGYANG Securities Hong Kong Limited #2107, 21F, Hutchison House, 10 Harcourt Road, Central, Hong Kong Tel: +852 3980 6000 Manila TONGYANG Savings Bank Ground Floor Chatham House 116 Valero cor. V.A. Rufino streets, Salcedo Village, Makati City Metro Manila, Philippines Tel: +63 2 845 3838 Phnom Penh TONGYANG Securities (Cambodia) Plc. #138, 2nd Floor, Paragon Bldg, Norodom Blvd, Phnom Penh, Cambodia Tel: +855 23 224 125 20 Research Center Yuanta Securities Building Euljiro 76 Jung-gu Seoul, Korea 100-845 Tel: +822 3770 3454