Healthcare

In this briefing:

1. U.S. Equity Strategy: Has “the Pullback” Begun?
2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
3. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside
4. Celgene and Bristol-Myers Squibb – Undervalued and Underappreciated
5. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside

1. U.S. Equity Strategy: Has “the Pullback” Begun?

The weight of the evidence suggests that the pullback has begun. This belief is supported by overbought conditions combined with the S&P 500, MSCI ACWI, and nearly all Sectors hitting logical resistance. Assuming the pullback continues, the next question is how deep or damaging will it be? In this report we highlight various market/technical indicators we are monitoring, as well as pointing out attractive set ups within Consumer Discretionary and Health Care Sectors.

2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader

• Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
• It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
• It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
• However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
• Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
• We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
• Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.

3. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, noted today that Brookfield Asset Management (BAM US) is seeking the necessary internal approvals to submit a binding proposal by 31 January. We believe that Brookfield will come through with its binding proposal as the delays are not due to issues cropping up from the due diligence but due to ongoing financing negotiations with multiple banks.

4. Celgene and Bristol-Myers Squibb – Undervalued and Underappreciated

A dismal 2018 for the pharmaceutical and bio-tech stocks seems far in the rear view mirror. 2019 began with a bang with two blockbuster deals in the pharmaceutical space within days. In this note, we discuss Bristol Myers Squibb’s Co (BMY US) acquisition of Celgene Corp (CELG US) and  outline our view that investors should go long BMY.

5. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside

• Dr Lal Pathlabs (DLPL IN) is the largest pathology chain in India and caters to the Rs 600 bn market growing at 15% Cagr. It is strongest in the lucrative NCR and Kolkata markets.
• Management has the best capital allocation track record in the pathology chain space. Network expansion mirrored patient volume growth.
• Patient volume growth has been the strongest among peers.
• However, revenue/patient has been declining as competitive pressure forced them to do away with price hikes for 2 consecutive years (2017-18). Increasing bundling of tests without adequate price hikes leading to sharp decline in revenue/sample.
• Expansion into eastern India with second central reference lab will drive down realizations
• Revenue growth deceleration and Ebitda margin contraction over FY17-18 looks to have stabilized now but are unlikely to revive.
• We expect Revenue and PAT Cagr of 15% and 16% respectively over FY18-21 against 21% and 34% respectively delivered over FY13-16.
• At CMP of Rs 996, Dr Lal trades at 36.1x FY20 EPS. Dr Lal’s steep multiples could see some compression with the lower growth trajectory and once the faster-growing Metropolis lists in the market. Our target price (30x FY20F) is Rs 827 implying 17% downside.

In this briefing:

1. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun
2. Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs
3. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
4. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
5. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

1. Samsung C&T: A Restructuring of Fashion Business Is Likely After the Stepping Down of Lee Seo-Hyun

Lee Seo-Hyun (age 46), the billionaire second daughter of the Samsung Group Lee Gun-Hee, recently stepped down from her position as the CEO of Samsung C&T (028260 KS)‘s fashion business. After resigning from Samsung C&T, Lee Seo-Hyun will become a chairperson of the Samsung Foundation, focusing on corporate social responsibility activities.

Among the various fashion brands, the most problematic has been the 8 Seconds SPA brand, which has been continuing to lose money. Despite big ambitions to make 8 Seconds as one of the leading global SPA brands, this plan has fluttered, especially in the overseas markets such as China. This strongly suggests that there could be a big restructuring of the company’s fashion business in the coming months. 

Our NAV analysis of Samsung C&T suggests a range of 122k won to 139k won, which would represent an upside of 11% to 27%. In our NAV analysis, the investment stakes in affiliates were 19.2 trillion won, core business operating value was estimated at 9.9 trillion won (using 8x consensus OP in 2019), net cash of 2.2 trillion won, and Samsung Everland land value (post 50% taxes) of 1.8 trillion won. The range of value reflects the different discount for the quasi-holdco structure (20-30% discount).

2. Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs

On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR.

The logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.

Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.

The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.

3. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

4. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week. 

5. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

This insight briefly summarises the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in  2018.

Transactions discussed were typically Asia-Pacific-centric or concerned an outbound transaction initiated from an Asia-Pacific-listed company. The majority of these deals involved a market cap/deal size in excess of US$100mn.

The mega deals of Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN), Sprint Corp (S US)/T Mobile Us Inc (TMUS US) and Intl Business Machines (IBM US)/Red Hat Inc (RHT US) were first discussed in May, June and November respectively.

• The most generous country? The average premium for Australian and Hong Kong deals was almost identical at 38%.
• The stingiest? Singapore with 16%.
• The graveyard award? 49 deals were completed with 35 ongoing. Australia had four deals (out of a total of 29, the most for any country) that were abandoned for various reasons – such as CKI getting dinged by FIRB in its tilt for APA Group (APA AU). But in terms of outright fails, Hong Kong takes home that award following the failures in Pou Sheng Intl Holdings (3813 HK), Guoco Group Ltd (53 HK) and Spring Real Estate Investment Trust (1426 HK).

During the year a number of large, high profile transactions were completed that were also extensively analysed and discussed on Smartkarma. However, if the initial discussions between the two parties (acquirer & target) took place pre-2018, they are not included in the charts above. A selection of these include (in no particular order): 

Broadcom Corp Cl A (BRCM US)/Qualcomm Inc (QCOM US)
Alps Electric (6770 JP)/Alpine Electronics (6816 JP)
Westfield Corp (WFD AU)/Unibail-Rodamco SE (UL FP)
Idemitsu Kosan (5019 JP)/Showa Shell Sekiyu Kk (5002 JP)
Orient Overseas International (316 HK)

In this briefing:

1. Healius (HLS AU): Bid Rejection Provides Option Value
2. Amarin–2019’s Biggest Buyout Target for Big Pharma
3. Healius And The (Likely) First Salvo

1. Healius (HLS AU): Bid Rejection Provides Option Value

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. Healius just took four days to reject Jangho Group Co Ltd A (601886 CH)’s 3 January 2018 proposal of A$3.25 cash per share as it “is opportunistic and fundamentally undervalues Healius.”

2. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

3. Healius And The (Likely) First Salvo

Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal.  Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.

The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.

Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.

This proposal does, however, indicate Healius was probably oversold.

This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.

In this briefing:

1. Amarin–2019’s Biggest Buyout Target for Big Pharma
2. Healius And The (Likely) First Salvo
3. EGM Diaries
4. HCG Q2FY19 Results Update

1. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

2. Healius And The (Likely) First Salvo

Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal.  Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.

The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.

Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.

This proposal does, however, indicate Healius was probably oversold.

This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.

3. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

4. HCG Q2FY19 Results Update

Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

In this briefing:

1. Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs
2. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
3. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
4. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
5. Healius (HLS AU): Bid Rejection Provides Option Value

1. Celgene Acquisition by Bristol-Myers Squibb: A Call to Arbs

On January 3, 2019, Bristol Myers Squibb Co (BMY US) and Celgene Corp (CELG US) announced a definitive agreement for BMY to acquire Celgene in a $74 billion cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR.

The logic behind the transaction is to create a biopharma powerhouse with leading franchises in oncology, immunology and inflammation (autoimmune diseases), and cardiovascular medicine. After completion, BMY will have six expected launches in the next 12-24 months representing over $15 billion in revenue potential, and an early pipeline that includes 50 high potential assets. In addition to amassing a powerhouse biopharma portfolio, the combination is expected to yield annual cost synergies of $2.5 billion by 2022.

Terms of the deal call for each CELG share to be converted into one BMY share and $50 cash, plus one tradeable CVR worth $9 if specific FDA approvals are received for three drugs by certain dates. The 1.0 BMY exchange ratio is fixed. Upon completion of the deal BMY shareholders will own about 69% of the combined company with former CELG shareholders owning the other 31%.

The deal is conditioned on approvals by both CELG and BMY shareholders as well as regulatory approvals that include the U.S. and the EU. Financing is not a condition. The companies expect the complete the deal in the third calendar quarter of 2019.

2. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

3. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week. 

4. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

This insight briefly summarises the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in  2018.

Transactions discussed were typically Asia-Pacific-centric or concerned an outbound transaction initiated from an Asia-Pacific-listed company. The majority of these deals involved a market cap/deal size in excess of US$100mn.

The mega deals of Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN), Sprint Corp (S US)/T Mobile Us Inc (TMUS US) and Intl Business Machines (IBM US)/Red Hat Inc (RHT US) were first discussed in May, June and November respectively.

• The most generous country? The average premium for Australian and Hong Kong deals was almost identical at 38%.
• The stingiest? Singapore with 16%.
• The graveyard award? 49 deals were completed with 35 ongoing. Australia had four deals (out of a total of 29, the most for any country) that were abandoned for various reasons – such as CKI getting dinged by FIRB in its tilt for APA Group (APA AU). But in terms of outright fails, Hong Kong takes home that award following the failures in Pou Sheng Intl Holdings (3813 HK), Guoco Group Ltd (53 HK) and Spring Real Estate Investment Trust (1426 HK).

During the year a number of large, high profile transactions were completed that were also extensively analysed and discussed on Smartkarma. However, if the initial discussions between the two parties (acquirer & target) took place pre-2018, they are not included in the charts above. A selection of these include (in no particular order): 

Broadcom Corp Cl A (BRCM US)/Qualcomm Inc (QCOM US)
Alps Electric (6770 JP)/Alpine Electronics (6816 JP)
Westfield Corp (WFD AU)/Unibail-Rodamco SE (UL FP)
Idemitsu Kosan (5019 JP)/Showa Shell Sekiyu Kk (5002 JP)
Orient Overseas International (316 HK)

5. Healius (HLS AU): Bid Rejection Provides Option Value

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. Healius just took four days to reject Jangho Group Co Ltd A (601886 CH)’s 3 January 2018 proposal of A$3.25 cash per share as it “is opportunistic and fundamentally undervalues Healius.”

In this briefing:

1. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
2. Healius (HLS AU): Bid Rejection Provides Option Value
3. Amarin–2019’s Biggest Buyout Target for Big Pharma
4. Healius And The (Likely) First Salvo
5. EGM Diaries

1. (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not

This insight briefly summarises the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in  2018.

Transactions discussed were typically Asia-Pacific-centric or concerned an outbound transaction initiated from an Asia-Pacific-listed company. The majority of these deals involved a market cap/deal size in excess of US$100mn.

The mega deals of Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN), Sprint Corp (S US)/T Mobile Us Inc (TMUS US) and Intl Business Machines (IBM US)/Red Hat Inc (RHT US) were first discussed in May, June and November respectively.

• The most generous country? The average premium for Australian and Hong Kong deals was almost identical at 38%.
• The stingiest? Singapore with 16%.
• The graveyard award? 49 deals were completed with 35 ongoing. Australia had four deals (out of a total of 29, the most for any country) that were abandoned for various reasons – such as CKI getting dinged by FIRB in its tilt for APA Group (APA AU). But in terms of outright fails, Hong Kong takes home that award following the failures in Pou Sheng Intl Holdings (3813 HK), Guoco Group Ltd (53 HK) and Spring Real Estate Investment Trust (1426 HK).

During the year a number of large, high profile transactions were completed that were also extensively analysed and discussed on Smartkarma. However, if the initial discussions between the two parties (acquirer & target) took place pre-2018, they are not included in the charts above. A selection of these include (in no particular order): 

Broadcom Corp Cl A (BRCM US)/Qualcomm Inc (QCOM US)
Alps Electric (6770 JP)/Alpine Electronics (6816 JP)
Westfield Corp (WFD AU)/Unibail-Rodamco SE (UL FP)
Idemitsu Kosan (5019 JP)/Showa Shell Sekiyu Kk (5002 JP)
Orient Overseas International (316 HK)

2. Healius (HLS AU): Bid Rejection Provides Option Value

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. Healius just took four days to reject Jangho Group Co Ltd A (601886 CH)’s 3 January 2018 proposal of A$3.25 cash per share as it “is opportunistic and fundamentally undervalues Healius.”

3. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

4. Healius And The (Likely) First Salvo

Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal.  Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.

The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.

Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.

This proposal does, however, indicate Healius was probably oversold.

This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.

5. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

In this briefing:

1. HCG Q2FY19 Results Update
2. Healius (HLS AU): An Unattractive Bid
3. Viva Biotech (维亚生物) IPO: When CRO Becomes Early Stage Biotech Investor
4. Hansoh Pharma (翰森制药) IPO: Takeaways from Recent 4+7 City Centralized Tender Results
5. Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December

1. HCG Q2FY19 Results Update

Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

2. Healius (HLS AU): An Unattractive Bid

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. On 3 January 2018, Healius received an unsolicited and highly conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25 cash per share.

3. Viva Biotech (维亚生物) IPO: When CRO Becomes Early Stage Biotech Investor

Viva Biotechnology, a China-based drug discovery company, is seeking to raise USD 200m to list on the Hong Kong Stock Exchange. In this insight, we cover the following topics:

• Services provided by Viva. 
• Revenue model of the company.
• The CRO market.
• The company’s history and shareholders.
• Our initial thoughts on valuation.

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect

4. Hansoh Pharma (翰森制药) IPO: Takeaways from Recent 4+7 City Centralized Tender Results

Hansoh Pharma, a leading generic pharmaceutical manufacturer, filed an application to list on the Hong Kong Stock Exchange. In our previous insight, we have covered the company’s core products and pipeline candidates. We also mentioned the recent regulatory development that affects the industry of generic drug manufacturers, in particular, the recent 4+7 City Centralized Tender Results (4+7 城市药品集中采购). 

• Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different

• Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect
• Ascentage Pharma (亚盛医药) IPO: Too Early for an IPO
• Junshi Bioscience (君实医药) IPO: Thoughts on Valuation (Part 2)
• Junshi Bioscience (君实医药) IPO: Early in Application but Behind in Key Indications (Part 1)
• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)

• AOBiome Therapeutics IPO: Hope for Natural Therapeutic Treatment
• Stealth Biotherapeutics IPO: Cure the Symptoms but Not the Cause (Part 1)
• Innovent Biologics (信达生物) IPO: Pricing the PD-1 and Biosimilars Competition (Part 2)
• Innovent Biologics (信达生物) IPO: A Major PD-1 MAb Competitor Might Have Just Emerged (Part 1)
• MicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
• Hua Medicine (华领医药) IPO: Thoughts on Valuation
• Hua Medicine (华领医药) IPO: Reviving Roche’s Failed Attempt?
• BeiGene (百济神州) IPO: Dual-Listing with Upside Capped in the Near Term
• Ascletis Pharma (歌礼制药) IPO: Valuation Not Justified by Ganovo and Ravidasvir NPV (Part 3)
• Ascletis Pharma (歌礼制药) IPO: Three Valuation Risk Factors (Part 2)
• Ascletis Pharma (歌礼制药) IPO: Emerging Player in the Crowded HCV Drug Market
• China Isotope & Radiation IPO: Oligopoly, Visible Growth and High Barrier to Entry
• Zai Lab IPO: Thoughts on Valuation, Risks and Upsides (Part 2)
• Zai Lab IPO: Experienced Team, Promising In-Licensing Drug Pipeline (Part 1)

5. Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

In this briefing:

1. Healthscope (HSO AU): A Material Bump to Brookfield’s Offer Is Doubtful
2. India Generic Drugs: Antitrust Suit Could Cost Billions
3. Celltrion/Celltrion H Pair: Last 2 Days Must Be Price Divergence, Not Mean Reversion

1. Healthscope (HSO AU): A Material Bump to Brookfield’s Offer Is Doubtful

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, is caught again in a bidding war between Brookfield Asset Management (BAM US) and BGH-AustralianSuper. On 21 December 2018, Healthscope extended exclusive due diligence with Brookfield. Brookfield noted that it has “no reason to believe it would not be willing and able to proceed” with its proposal.

2. India Generic Drugs: Antitrust Suit Could Cost Billions

This Insight builds on our previous Insight, India Generic Drugs: US Antitrust Inquiry Widens by discussing estimated potential liabilities and details contained in court filings. Public comments by one of the plaintiffs (47 states) suggest the defendants’ aggregate liability could exceed US$6 billion, the largest previous settlement on record. There is not enough information to apportion potential liability by company, but some companies are better-positioned to bear the cost of a settlement than others. The process could drag on for an undetermined period of time (which helps the defendants). At the same time, the overhang will keep a lid on generic drug prices in the US market. 

Among Indian generic companies, Dr. Reddy’S Laboratories (DRRD IN), Aurobindo Pharma (ARBP IN),Cadila Healthcare (CDH IN), and Glenmark Pharmaceuticals (GNP IN) have the highest risk based on their market caps and exposure to the US market.       

3. Celltrion/Celltrion H Pair: Last 2 Days Must Be Price Divergence, Not Mean Reversion

• The accounting fraud issue had hammered the Celltrion duo nearly equally up until Dec 26. But last two days were different. Healthcare got hurt much more deeply. Celltrion fell only 2.41%, but Healthcare fell 11.52%.
• The accounting issue is supposed to be equal to both. KOSPI move and merger are still alive to push up Healthcare. Local institutions and foreigners have bashed both pretty much equally in the last two days. This is another sign that it was more of a price divergence than a mean reversion.
• The duo is now at 20D MA and also the yearly mean. I expect it to go substantially below the yearly mean on KOSPI move and merger expectations. A powerful downwardly mean adjusting force still seems to be in action. I’d long Healthcare and short Celltrion to exploit the latest price divergence.

In this briefing:

1. Celltrion/Celltrion H Pair: Last 2 Days Must Be Price Divergence, Not Mean Reversion
2. Alkem Laboratories – En Route to Recovery, Valuations Attractive
3. KRI (KRI MK): Continued Capacity Expansion to Meet Solid Demand

1. Celltrion/Celltrion H Pair: Last 2 Days Must Be Price Divergence, Not Mean Reversion

• The accounting fraud issue had hammered the Celltrion duo nearly equally up until Dec 26. But last two days were different. Healthcare got hurt much more deeply. Celltrion fell only 2.41%, but Healthcare fell 11.52%.
• The accounting issue is supposed to be equal to both. KOSPI move and merger are still alive to push up Healthcare. Local institutions and foreigners have bashed both pretty much equally in the last two days. This is another sign that it was more of a price divergence than a mean reversion.
• The duo is now at 20D MA and also the yearly mean. I expect it to go substantially below the yearly mean on KOSPI move and merger expectations. A powerful downwardly mean adjusting force still seems to be in action. I’d long Healthcare and short Celltrion to exploit the latest price divergence.

2. Alkem Laboratories – En Route to Recovery, Valuations Attractive

Alkem Laboratories (ALKEM IN) produces branded generics, generic drugs, active pharmaceutical ingredients and neutraceuticals, which it markets in India and over 50 countries internationally. With a portfolio of over 700 brands covering all the major therapeutic segments and a pan-India sales and distribution network, Alkem has been ranked amongst the top ten pharmaceutical companies in India by sales for the past 13 years.

We are optimistic about Alkem because-

• Alkem continues to grow significantly ahead of the segment growth rate of ~16% in the chronic therapy areas of Cardiac, Antidiabetic, Neuro / Central nervous system (CNS) and Derma. Alkem continues grow in the acute therapy areas of Anti-infective, Gastro-intestinal, Pain/ Analgesic and Vitamins / Minerals /Nutrients.

• We expect India revenues to grow at CAGR 13% (FY18-21E) to Rs 64,687 mn in FY21E from Rs 44,900 mn in FY18. We expect US revenues to grow at CAGR 31% (FY18-21E) to Rs 30,438 mn from Rs 13,667 mn in FY18 and other international business revenues to grow at CAGR 11% (FY18-21E) to Rs 6,443 mn in FY21E from Rs 4,670 mn in FY18.

• We expect EBITDA to grow at CAGR 21% (FY18-21E) to Rs 18,638 mn in FY21E from Rs 10,566 mn in FY18 and EBITDA margins to expand by ~ 190 bps to 18.4% in FY21E from 16.5% in FY18. We expect PAT to grow at CAGR 27% (FY18-21E) to Rs. 12,979 mn in FY21E from Rs 6,289 mn in FY18 and we expect PAT margins to expand by ~ 300 bps to 12.8% in FY21E from 9.8% in FY18.

• We expect RoE to expand by ~530 bps to 19.0% in FY21E from 13.7% in FY18 and RoCE to expand by ~390 bps to 21.1% in FY21E from 17.2% in FY18

We initiate coverage on Alkem with fair value of Rs. 2,260/- representing a potential upside of 21% in the next 12 months. We arrived at the fair value by applying 22x multiple to September 20E EPS of Rs 102. Currently, the stock trades at 21x and 17x its earnings estimates for FY20E and FY21E respectively. After a very volatile 2018, we believe Alkem share price may have smooth upwards move in 2019 driven by strong PAT growth in the next 3 quarters.  

3. KRI (KRI MK): Continued Capacity Expansion to Meet Solid Demand

• More attractive to analysts, low price-to-sales, and low correlation with Western stock markets relative to its sector
• To meet strong demand, KRI recently commissioned Plant 17, which increased capacity by 1.5bn. Upcoming Plants 18 and 19 to commission in 2019 should add another 5.5bn or a 20% capacity increase
• High barriers to entry for medical gloves due to stringent compliance to regulatory requirement aids KPI market shares
• Trades above ASEAN Health Care at 19CE* 4.1x PB, in line with offering a better ROE
• Risks: Sudden jump in raw materials prices

* Consensus Estimates

In this briefing:

1. Amarin–2019’s Biggest Buyout Target for Big Pharma
2. Healius And The (Likely) First Salvo
3. EGM Diaries
4. HCG Q2FY19 Results Update
5. Healius (HLS AU): An Unattractive Bid

1. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

2. Healius And The (Likely) First Salvo

Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal.  Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.

The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.

Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.

This proposal does, however, indicate Healius was probably oversold.

This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.

3. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

4. HCG Q2FY19 Results Update

Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

5. Healius (HLS AU): An Unattractive Bid

Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. On 3 January 2018, Healius received an unsolicited and highly conditional proposal from Jangho Group Co Ltd A (601886 CH) for A$3.25 cash per share.