R&D Costs Key to 2H20 Performance
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
Affected by administrative measures of the MFDS over March~May, Dong-A ST recorded a 2Q20 operating loss. Although cost reduction effects due to Covid-19 remain in play, if R&D costs increase, the firm’s 2H20 earnings may prove sluggish. In addition to delayed milestone inflow from DA-4501 (MerTK, anticancer drug), the company appears to lack R&D momentum.
Downgrade rating to Hold
We lower our TP for Dong-A ST from W110,000 to W100,000 and downgrade our investment rating to Hold. In Dec 2016, Dong-A ST signed a licensing-out deal for DA-4501 (targeting MerTK; anti-cancer drug) with global pharmaceutical company Abbvie for US$525mn (upfront fees of US$40mn). Given the lack of progression over the last nearly five-year period, doubts are rising towards the firm’s willingness to develop the pipeline. In addition to adjusting 2020E EPS by 9.8%, we believe it is necessary to apply a discounted multiple. We estimate Dong-A ST’s operating value at W881.5bn by applying a target P/E of 20.7x (25% discount to the average P/E of Yuhan, Green Cross, and CKD) to 2020E NP of W42.5bn. Following European phase I trials of DA-8010 (overactive bladder), phase III trials are to begin in Korea. Meanwhile, US phase III trials for DA-9801 (diabetic neuropathy) have been delayed. While US phase II trials of DA-9805 (Parkinson’s disease) are complete, the direction of future development looks unclear. Given that US phase I trials of DA-1241 (type 2 diabetes) have now wrapped up, focus is turning to both the firm’s lack of ongoing R&D momentum and negatives such as its failed spin-off strategy.
R&D costs key to 2H20 performance
On a non-consolidated basis, Dong-A ST logged 2Q20 sales of W111.6bn (-26.4% y-y) and an operating loss of W9.3bn (TTL y-y; OPM of -8.3%), with both sales and operating deficit arriving better-than-feared. Sales at the firm’s ethical drugs business fell by W90.9bn q-q on a three-month suspension in business operations due to administrative measures by the Ministry of Food and Drug Safety (MFDS; violation of sales regulations for pharmaceuticals, etc). However, sales growth for products unaffected by the MFDS orders, including Suganon (diabetes) and Gaster (digestive ulcer) proved favorable. Exports of Bacchus and Growtropin (growth hormone) came in sluggish due to the spread of Covid-19 in Cambodia and Brazil, respectively, with overall exports totaling W37.6bn (-12.8% y-y). Sales at the medical device business reached W8.7bn (-17.1% y-y). SG&A expense declined 10.3% y-y thanks to a reduction in marketing and R&D expenses. We estimate the firm’s annual R&D expenditure at W77.8bn (+5.0% y-y), expecting a rise in costs due to the progression of normal R&D activities in 2H20.