Medical Aesthetics Market Recovering amid Easing in COVID-19 Crisis
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
A large number of pharmaceutical/bio players, particularly testing kit companies, have been seeing earnings expansion amid the Covid-19 outbreak. With share prices of related treatment and vaccine providers soaring and new orders at contract manufacturing organization (CMO) players increasing, the Kospi pharmaceuticals index has been outperforming the market by a wide margin in 1H20. Moving ahead, we expect the pharmaceutical/bio industry to further benefit amid the ongoing global spread of Covid-19.
In particular, healthcare players (such as health functional foods makers) have been benefitting from rising awareness on health amid the pandemic. It is worth noting that Dongkook Pharm and Remed, firms that boast attractive valuations and strong growth potential, have been recently enjoying a rapid recovery in their share prices.
As for the medical aesthetics industry, while it suffered a blow from Covid-19, demand is improving amid an easing in the Covid-19 crisis in Korea and other Asian countries. Against this backdrop, we suggest Korea’s largest toxin player, Hugel, whose major product Botulax is expected to obtain Chinese approval. Meanwhile, the healthcare IPO market is expected to be revitalized by the planned IPO of SK Biopharm. Helped by the emergence of another market-leading stock, we believe that the bio sector uptrend will sustain in 2H20.
Among domestic pharmas, diagnostic kit companies have first benefited from Covid-19
We expected in our Jan 28 report that among domestic pharmas, diagnostic kit companies will first benefit from Covid-19. In Korea, where Covid-19 spread fast earlier than other countries, domestic diagnostic players have sped up to develop and release diagnostic kits and have received emergency use authorization (EUA) from the US FDA ahead of their foreign counterparts. As such, they have been able to sell such kits in the domestic market and export them, seeing brisk sales growth. Seegene (obtained EUA in February) booked 1Q20 sales growth of 200% y-y and OP growth of 600% y-y. In 2Q20, robust sales growth is also expected for authorized testing kit firms LabGenomics and Sugentech → Korea’s infectious disease response system, which has improved based on accumulated experiences from swine flu and MERS, has enabled the country to cope with the current pandemic in an efficient manner.
Domestic firms that have obtained EUA include: OSANG Healthcare, Seegene, SD Biosensor, LabGenomic, and Seasun Biomaterials → As some of such firms are unlisted, an IPO rush is expected.
Covid-19 treatment/vaccine development efforts
As the first approved Covid-19 treatment, Gilead's Remdesivir has been supplied globally. Having failed to obtain approval as an Ebola treatment, Remdesivir was then known to have been effective for treating Covid-19 patients, triggering the beginning of global clinical trials for the drug in February. After phase-III trial results were announced on Apr 29, the drug obtained EUA in the US and Japan, among others, and is being used for severe Covid-19 patients. The results for clinical trials on the efficacy of the drug in mild-to-moderate patients are to be announced in June. Depending on the results, the drug could be administered for early-stage patients with Covid-19 → But, as Gilead supplies Remdesivir to several countries free of charge, the drug should have negligible effects profitability, given high R&D costs.
Moderna announced positive interim phase-I trials data for Covid-19 vaccine candidate mRNA-1273 on May 18. Inovio and BioNTech, and others are also striving to develop Covid-19 vaccines.
While domestic firm Ilyang Pharmaceutical has begun global clinical trials on a Covid-19 treatment, chances look slim that domestic companies will succeed in globally supplying large volumes of Covid-19 treatments/vaccines.
CMO Industry: Covid-19 offers promising business opportunity
The Covid-19 pandemic has been positive for CMOs, in the following two aspects: 1) production site diversification; and 2) explosive demand growth in relation to Covid-19 treatment and vaccine clinical trials.
Global demand for bio CMOs has been on a rise, in line with rising numbers of both new bio drugs and patent expiries on original drugs. In 2019, the share prices of the global Big-3 CMOs (Lonza, Samsung Biologics, and Wuxi Bio) climbed 58%, 34%, and 45%, respectively. Recently, demand for CMOs has grown explosively amid the pandemic.
On Apr 10, Samsung Biologics signed a W440bn worth contract with Vir Biotechnology for supply of antibodies for Covid-19 treatment development. With its 2020 order target for plant #3 having already been reached, the possibility of plant #4 being constructed has risen. Covid-19 pandemic has helped to strengthen fundamentals of domestic CMOs. Samsung Biologics has secured three major (W100bn or more) supply contracts with global drug companies including Immunomedics, GSK, and a US company in 2020. It is confirmed that new orders have also increased for ST Pharm, a CMO for RNA-based drugs.
Undervalued growth stocks deserve attention
Among pharma plays under our coverage, Dongkuk Pharm and Remed, both being small/mid-cap pharmas, have risen strongly (+45.0%, +153.7%, respectively) from their bottom points in March. With both still trading below 2020E P/E of 15x, both offer strong valuation merit. And, as a new growth cycle has just kicked for each, we believe the two firms will chalk up higher relative returns than their peers in times of an economic rebound. Having booked sound 1Q20 earnings despite Covid-19, earnings growth momentum at the two players is to further strengthen in the post-Covid era, a positive that warrants special attention.
Dongkuk Pharma’s Madeca Cream sales expanded 60% y-y in 1Q20, mainly led by home shopping channel; we predict that its cosmetic business sales will rise to W120bn in 2020 (from W56bn in 2018 and W83bn in 2019). In addition, its other business areas (ethical drugs, over-the-counter drugs, and health functional food products) are also displaying steady earnings growth.
Remed supplies its body contouring systems to Allergan which resells them in US and European markets; despite likely sluggish 2Q20 earnings due to the Covid-19, we believe that Remed’s mid/long-term growth story remains alive.
Promising healthcare players to go public in 2H20
In 2018, amid rising Kosdaq indices and a bullish IPO market, the number of IPOs for healthcare firms arrived at a record-high level. But, in 2019, weighed upon by the Lime Asset Management scandal and a series of failures in phase-III clinical trials, the IPO market turned bearish. Early this year, the healthcare IPO market hit a trough, with listings for Kainos Medicine and NovMetaPharma being delayed.
But, with the Korean stock market rapidly emerging from Covid-19 effects, IPO market sentiment has been improving as of late. Of note, DreamCIS’s IPO (listed on May 22) drew strong demand, oversubscribed 926 times during the book building session for institutional investors.
We note that SK Biopharm is slated to go public in early July. Following the IPO of Samsung Biologics in Nov 2016 and Celltrion Healthcare in Jul 2017, SK Biopharm’s listing should herald the arrival of another market-leading stock in the healthcare sector. In particular, we positively view the fact that SK Biopharm already possesses two products (XCOPRI, Sunosi) that have obtained US approval.
Medical aesthetics market recovering amid easing in Covid-19 crisis
Amid population aging and rising household income, the focus of the healthcare industry has been greater expanding from disease treatment to include medical aesthetics. The medical aesthetics market is expected to expand at a CAGR of 11.5% from 2019 to reach US$22.2bn by 2025. Of note, in the Korean medical aesthetics market, non-surgical treatments are preferred over surgical ones, a situation that has been benefitting toxin and filler players.
Of note, toxin makers’ earnings, which mainly come from domestic sales and export to other Asian countries, have been hit hard by the Covid-19 crisis. However, thanks to an easing in the Covid-19 crisis in Asia, the medical aesthetics market in the region has been recovering. In particular, in Korea, the fact that emergency relief funds can be used in plastic surgery clinics bodes well for a revitalization in the medical aesthetics industry. Of note, Korea’s toxin exports resumed recovery in March. A Chinese approval of Hugel’s toxin product in 2H20 will likely contribute to growth of Korean medical aesthetics makers’ earnings, in our view.