Pharmaceutical/Bio
The author is an analyst for Shinhan Securities. He can be reached at jaewonjeong@shinhan.com -- Ed.
Pharmaceutical/bio sector to rebound in 2H23 on favorable macro conditions and progress in new drug pipelines
Pharmaceutical/bio stocks have fallen out of investors’ favor with valuations declining on interest rate hikes. The US Federal Reserve recently raised the Fed funds rate slightly, but hinted at a pause in rate increases going forward. We expect to see a re-rating of shares with the market taking renewed interest in the sector in 2H23 in light of favorable macro conditions and positive results expected from new drug pipelines at companies like Samsung Biologics and Celltrion.
Focus on stocks with solid momentum and explosive growth potential
For 2H23, we focus on stocks that are stable and engaged in markets with solid momentum, and those that are capable of achieving explosive growth despite uncertainty. We see momentum building up for biosimilar, contract manufacturing organization (CMO), and potassium-competitive acid blocker (P-CAB) plays. Biosimilar companies in our favor are those gearing up to tap into the Humira biosimilar market on top of a steady inflow of sales from existing products. CMOs are expected to enjoy stable sales and an increase in demand from modality expansion. P-CAB drugs are in the early phase of overseas market forays, and steadily expanding presence in the domestic market. Nonalcoholic steatohepatitis (NASH) drugs and digital healthcare have explosive growth potential. There is unmet demand for NASH therapeutics, which garnered attention in December of last year when positive phase III clinical trial results were announced for the first time. It will take time for digital healthcare to become mainstream, but this new technology is being utilized at a faster pace in specific areas.
Top picks are stocks with growth potential for mainstay business and positive events
Our sector top picks are Celltrion Group, Hanmi Pharm, and Lunit. Celltrion Group is expected to record an increase in sales contribution from high-margin Remsima SC in addition to solid sales growth of existing products. Yuflyma will likely hit the US market in July after receiving approval from the US Food and Drug Administration in May. Development of biosimilar versions of drugs like Stelara and Eylea is also well underway. Hanmi Pharm should see stable earnings from mainstay products, including Rosuzet and Amosartan, as well as growth at subsidiaries. The company is currently developing a new drug to treat NASH, for which clinical study results should be available within the year. In 2H23, it is also likely to make visible progress in its contract development and manufacturing organization (CDMO) business for bio drugs.
Lunit is far behind the two companies mentioned above in terms of absolute sales, but is projected to achieve top-line expansion with the addition of new overseas clients. Its strong growth potential has been proven with 1Q23 earnings results, already attaining 80% of last year’s sales. We believe Lunit is at an advantage over peers in AI-based medical technology, and is engaged the digital healthcare business that is not constrained by policy and regulatory limitations.