Needs to Present Notable Results on R&D Pipeline Projects
The authors are analysts of Shinhan Investment Corp. They can be reached at shawn1225@shinhan.com and jhwon@shinhan.com, respectively. – Ed.
2Q22 preview: Solid earnings in line with consensus
We now expect Chong Kun Dang Pharmaceutical to post standalone operating profit of KRW28.4bn (-15.6% YoY, operating margin of 8.0%) on sales of KRW357.3bn (+9.3% YoY) for 2Q22, meeting consensus estimates. Company-wide sales growth was likely driven by brisk sales of mainstay products such as K-CAB, Prolia, and Atozet. Sales of Lipilou, which were hit hard by a temporary ban on production and sales imposed by the Ministry of Food and Drug Safety in 2021, seem to have returned to normal levels. Prolia sales should have jumped 40% YoY or 18% QoQ to KRW25.6bn in 2Q22 on market share gains as a first-line treatment option for osteoporosis. Despite top-line growth driven by mainstay products, we believe operating profit fell YoY on: 1) growing R&D spend alongside progress made on clinical trials for major pipeline projects; 2) cost settlement related to the recent decision to suspend clinical trials for Nafabelltan injections as a COVID-19 treatment; and 3) provisions set aside for flu treatments, including Tamiflu.
Profitability to improve on solid performance of top-selling drugs
For 2022, we forecast sales at KRW1.43tr (+7.4% YoY) and operating profit at KRW108.2bn (+15.0% YoY, operating margin of 7.6%). Sales of K-CAB, Prolia, and Atozet should remain brisk through 2H22. R&D spend will likely increase further (KRW162.5bn in 2021→KRW171.9bn in 2022F) following progress made on clinical trials. Nevertheless, the company stands to enjoy double-digit operating profit growth and visible margin gains for the full year on operating leverage effect driven by top-line growth of high-margin products. As R&D expenses account for the lion’s share of SG&A, slower-than-expected spending on R&D could lead to further profit gains in 2H22.
Target price lowered to KRW100,000; wait for R&D results
We lower our target price for Chong Kun Dang Pharmaceutical from KRW110,000 to KRW100,000, reflecting the enterprise value estimate based on 12-month forward EBITDA of KRW154.8bn, target EV/EBITDA of 7.9x, and net cash holdings. In addition to solid earnings from existing products, the company will need to present notable results on R&D pipeline projects for shares to see a boost. In the near term, results from follow-up clinical trials of CKD-510 and phase I (part 2) trial of CKD-702 are likely to provide share price momentum going forward.