In this briefing:
- CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)
- Opportunities in U.S. Technology Sector
- Hitachi High Tech’s Ace in the Hole
- India Generic Drugs: “Antitrust Unredacted”
- Versum Materials – Merck KGaA Not Going Away (Part II)
1. CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)
CanSino is a China-based biotechnology company with a focus on vaccine development. In our previous insight (link to Part 1 and Part 2), we have discussed CanSino’s drug pipeline, the competitive landscape, and the valuation.
As the company is starting pre-marketing, we will provide an updated valuation based on new information obtained from the approved application document. Our base case valuation for CanSino is USD 856 million on a pre-money basis. Majority of the rNPV based SOTP valuation still comes from its meningococcal conjugate vaccine (MCV2 and MCV4). Over the past few months, the company has completed Phase III for MCV4 and submitted NDA (new drug application) for MCV2 candidates.
2. Opportunities in U.S. Technology Sector
Technology is our favorite Sector within the U.S. equity landscape, and remains leadership – 73% of our Tech Groups are in the top 33% in terms of our Relative Strength Rankings (RSRs). Internally, semis and semi-suppliers continue to outperform and many names have pulled back to offer attractive entry points. In this report we highlight our favorite setups within the U.S. Technology Sector.
3. Hitachi High Tech’s Ace in the Hole
Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off. Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn. The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.
To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.
4. India Generic Drugs: “Antitrust Unredacted”
New information in the government’s investigation into antitrust violations by generic drug companies continues to surface. An unredacted version of the Attorneys General complaint was published recently by a health care trade publication. The unredacted portions of the document paint an incriminating picture of the industry, increasing the pressure to settle. The timetable for the process remains open-ended, and manufacturers will be reluctant to raise prices absent documentable product shortages. Among the Indian companies, Sun Pharmaceutical Indus (SUNP IN), Dr. Reddy’S Laboratories (DRRD IN), and Aurobindo Pharma (ARBP IN) feature prominently in the court filings.
5. Versum Materials – Merck KGaA Not Going Away (Part II)
Since my initial report on Versum Materials (VSM US) last week, Versum Materials – Entegris Beaten to the Punch by Merck KGaA , I’ve dug deeper and feel even more confident that Merck KGaA (MRK GR) is intent on seeing its proposal to acquire Versum to a successful conclusion, with or without a recommendation from the Versum board.
In this follow-up note I provide an update of events since last week, look at VSM’s corporate governance documents, review relevant landmark Delaware takeover case law, and elaborate on a possible path to control of Versum for Merck KGaA.
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