Daily Healthcare: Celltrion/Celltrion H Pair: Last 2 Days Must Be Price Divergence, Not Mean Reversion and more

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
4. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics

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

4. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics

The healthcare industry in Indonesia has undergone a massive change since the introduction of the National Health Insurance (JKN) in 2014. Although the program allows for better healthcare access for over 200mn Indonesians, the industry dynamics have shifted and Kalbe Farma (KLBF IJ) is one of the companies that has been on the losing side during this adjustment period.

With the Health and Social Security (BPJS) deficit forecast to grow to IDR16t by end of 2018, and with a continuing roll out of coverage to 250mn people by end of 2019, all parties in the healthcare industry are expected to continue subsidizing the program.  Hospitals and drug manufacturers have had to cope with relatively flat pricing from the INA-CBG (reimbursement) tariff since 2014, despite cost pressures stemming from the currency depreciation and inflation. KLBF has reported declines in its overall pharmaceutical margin, as well as low growth rates for its licensed and OTC (over the counter) drugs over the past five years.

Our recent meeting with the company revealed that to mitigate the JKN impact, KLBF has launched several strategies, including expanding into niche specialty products such as oncology and biosimilar drugs, as well as preventive and herbal supplements. We are also at a tipping point where KLBF’s non-OTC consumer health and nutritionals revenues are finally larger than the pharmaceutical revenues for the first time. In this insight, we will discuss whether the worst is already behind us, and if it is now time to take another look at the stock.