The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Chong Kun Dang (CKD) should feel limited Covid-19 impacts, thanks to its chronic disease-oriented drug portfolio. While we expect CKD’s 1Q20 earnings to show improvement on SG&A expense reduction, we lower our TP in light of declining pharmaceutical sector multiples.
Product portfolio relatively less affected by Covid-19
We lower our TP on CKD from W125,000 to W100,000, but maintain a Buy rating. The prescription of treatments for chronic diseases (eg, hyperlipidemia and hypertension) should be relatively free from the effects of Covid-19 (reduced visits to hospitals and pharmacies), as afflicted patients are typically prescribed one to three months’ of medication at a time. However, as a Covid-19-related economic downturn is likely to sap drug demand, we apply conservative 2H20 earnings estimates and lower 2020E EPS by 8.9%. Our target multiple has been adjusted from 22.8x to 20.8x, reflecting a drop in the 12-month forward P/E average of traditional domestic pharmas. We size CKD’s operating value at W1,114.4bn by applying a target P/E of 20.8x (average P/E of Yuhan, Green Cross, Dong-A ST, Dongkuk Pharm, and Huons) to 2020E NP of W53.7bn. CKD’s shares are currently trading at a 12-month forward P/E of 16.6x, an attractive valuation, in our view. We remain upbeat towards the firm’s strong R&D momentum.
▶Cost reduction effects widening due to Covid-19
On a non-consolidated basis, we expect CKD to report 1Q20 sales of W271.9bn (+16.2% y-y) and OP of W28.0bn (+67.4% y-y; OPM of 10.3%). We estimate 1Q20 Atozet (hyperlipidemia) sales at W14.8bn (+20.0% y-y), Januvia (diabetes) sales at W35.1bn (+16.2% y-y), and Imotun (autoimmunity) sales at W8.6bn (+15.0% y-y), forecasting sales growth for the company’s major ethical drug items. In addition, ongoing solid top-line growth is anticipated, thanks to likely robust sales of K-cab (gastroesophageal reflux disease) following the Ranitidine incident, continued new product effects for Prolia (osteoporosis), and low-base effect. Owing to a contraction in sales activities and reduced SG&A expense stemming from the Covid-19 situation, SG&A ratio likely narrowed by 1.3%p q-q despite increased R&D costs.
In 2Q20, both CKD-702 (EGFR x cMET) domestic phase I IND approval and CKD-516 + Imfinzi (PD-L1) combo domestic phase I IND approval are expected. We anticipate submission of CKD-508 (hyperlipidemia) US phase I IND application in 3Q20 and announcement of CKD-506 (rheumatoid arthritis, HDAC6) EU phase IIa results in 4Q20. In 2H20, CKD-506’s EU phase IIa target trials for inflammatory bowel disease patients should commence. In 4Q20, results are expected for CKD-510 (CMT) French phase I trials.