Variable Consideration Reflected as Positive Factor

The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.

 

Driven by Truxima and Herzuma launches in the US and Remsima SC launches in Europe, Celltrion Healthcare registered a 1Q20 earnings surprise. Backed by operating leverage effects, the firm appears to have entered a structural growth phase. We raise our TP to W110,000 and maintain the company as our top pick for the bio sector.

Revise up 2020 EPS by 62.0%

Raising our TP from W85,000 to W110,000, we maintain a Buy rating on Celltrion Healthcare, our top pick for the bio industry. As of March, Truxima’s US market share reached about 8%. We revise up our estimate for the drug’s 2020 US market share from 7.3% to 11.3% (2021F: 13.3% → 15.3%). Meanwhile, direct sales of Remsima SC in Europe have topped W7.1bn for the first time. Believing that approval for additional indications will be acquired in 2H20, we expect to see further profitability improvement going forward on full-fledged prescription of Remsima SC and an increasing portion of direct sales. We estimate the firm’s consolidated 2020 sales at W1,783.9bn (+62.0% y-y) and OP at W282.3bn (+241.0% y-y; OPM of 15.8%). Based on the DCF method, we size the company’s operating value at W16.2tn (main assumptions: terminal growth rate of 3.1%, WACC of 6.0%, beta of 0.9), with fair market cap reaching W16.4tn, considering net borrowings.

Variable consideration reflected as positive factor

Celltrion Healthcare logged consolidated 1Q20 sales of W356.9bn (+61.9% y-y) and OP of W55.8bn (+496.1% y-y; OPM of 15.6%), with sales meeting our estimate and OP surpassing our forecast by 10.3%. We attribute the 1Q20 earnings surprise to: 1) continued US sales growth for Truxima and Herzuma; and 2) European partnership adjustments and a reduction in the purchase price of Remsima IV, which led to COGS-to-sales ratio improvement (SG&A expense fell 18.0% q-q to W38.7bn). In 1Q20, NP came to W76.2bn (+1204.9% y-y). Of note, W16.1bn classified as excess revenue under a profit sharing contract with ION Investment was reflected as non-operating income. In Europe, the price of Remsima looks steady. As a result of overly conservative estimates for the US price of Truxima, the drug’s actual selling price came in higher than expected. Accordingly, variable consideration served as a positive factor for the first time since its introduction in 2018. If the prices of Truxima and Herzuma remain stable in the US, Celltrion Healthcare’s earnings stability should strengthen further going forward.

 

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