The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Affected by changes in accounting standards for the recognition of research progress, Yuhan’s 4Q19 licensing fee income was restrained to W3.3bn. But, we positively view a widening in margins thanks to product mix improvement (on a decreased portion of merchandise). With a boost in 2020E licensing fee income representing a one-off factor, we adhere to our TP of W260,000.
To enjoy large-scale milestone inflow in 2Q20 on start of global clinical trials for Lazertinib
While Yuhan’s 4Q19 results disappointed, we maintain a Buy rating and a TP of W260,000, noting likely: 1) earnings growth at equity-method subsidiary Yuhan-Kimberly (which accounts for 33% of the domestic mask market) on mask inventory depletions amid the corona crisis; 2) large-scale milestone inflow in 2Q20 in line with the start of global clinical trials for Lazertinib. For full-year 2020, we expect the firm’s combined milestone fees received from Janssen, Boeringer Ingelheim, and Gilead to total around W87.3bn. Of note, the annual costs of W40.0bn for Asia phase-III clinical trials for Lazertinib monotherapy will likely be recognized as intangible assets. We forecast that Yuhan will show 2020 sales of W1.6tn (+6.1% y-y), with an OPM of 5.7%.
Margins improve on non-consolidated basis; operating losses at Yuhan Fine Chemical continue
On a consolidated basis, Yuhan posted 4Q19 sales of W393.7bn (-4.9% y-y) and OP of W8.5bn (+10.6% y-y; OPM of 2.2%), missing consensus by 3.9% and 11.3%, respectively. Sales of original drug Viread (hepatitis B) continued to narrow due to the release of generic drugs upon its patent expiry. Meanwhile, the company’s ethical drugs sales were limited to W255.3bn (-6.0% y-y) on the absence of sales for merchandise such as Pfizer’s Prevenar (pneumococcus) and GSK’s Fluarix (tetravalent flu). Impacted by a reduced marketing budget, sales growth slowed at the OTC division (sales of W29.0bn, +2.1% y-y) and at the household goods division (W29.5bn, +7.9% y-y). And, sales at the firm’s API business remained sluggish at W59.3bn (-24.7% y-y).
Yuhan’s booking of 4Q19 licensing fee income was affected by changes in the accounting standards that determine the recognition rate based on research progress. Due to the changes, the 4Q19 upfront fees that Yuhan recorded for its deals with Janssen and Boehringer Ingelheim slipped W2.9bn q-q and W2.0bn q-q, respectively. The likely booking of the deferred upfront fees this quarter should push up Yuhan’s 1Q20 total licensing fee income to W18.4bn. Given such, we have revised up our 2020 licensing fee income forecast from W80.2bn to W87.3bn. Elsewhere, Yuhan’s 4Q19 results show continued operating losses at consolidated subsidiaries Yuhan Fine Chemical and Addpharma.