Brief Healthcare: Biosimilar Battlefield: The Remsima/Inflectra Warning and more

In this briefing:

1. Biosimilar Battlefield: The Remsima/Inflectra Warning
2. Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation

1. Biosimilar Battlefield: The Remsima/Inflectra Warning

2019 marks an inflection point for Korean biosimilar companies Celltrion Healthcare (091990 KS), Celltrion Inc (068270 KS), and Samsung Biologics Co., (207940 KS). Several new product launches are on tap, but competition will be more intense from here. More to the point, our updated estimates of end market revenue in the EU for Celltrion’s Inflectra/Remsima show that revenue is declining: consistent with commentary regarding pricing pressure as new competitors enter the market. This development suggests that biosimilar launch curves won’t be as steep as in the past and that product maturity will come sooner.

Expectations for these companies remain high, so we remain wary of these stocks.

2. Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation

Consolidated sales were up 4.1% year-on-year in the three months to December, supported by demand from the medical, semiconductor and factory automation sectors, to which sales were up 8.7%, 11.0% and 8.2%, respectively. Gross profit was up 4.5%, but higher S,G&A expenses resulted in a 1.8% decline in operating profit (the operating margin was, however, up from the previous quarter). Net profit was up 4.9% after a decline in extraordinary losses. It was a relatively good performance in view of the cyclical downturns in the semiconductor and factory automation markets, and medical sales growth of only 3.2% in FY Sep-18.

Management’s three-year plan calls for 4.2% growth in sales and 0.9% growth in operating profit this fiscal year, followed by acceleration in FY Sep-20 and FY Sep-21. This is predicated on investment in new production capacity, which should be largely completed over the coming year, sufficient demand to absorb that capacity, and depreciation leveling off in FY Sep-21. Sales growth was on target in 1Q while operating profit fell short, but management has a record of cutting R&D and other expenses in order to achieve profit guidance. 

At ¥3,985, the shares are selling at 29x management’s implied EPS estimate for this fiscal year (net profit guidance/ current shares outstanding), 26x next year’s estimate and 22x the estimate for FY Sep-21.