Kyorin 1H FY18 (YE Mar'19) Results - First Glance

Asia Healthcare Analyst, Pathology Associates Limited

Dion Stéfan Büchner M.D., FCAP

Asia Healthcare Analyst

Pathology Associates Limited

Equity Bottom-Up

<p>We reiterate our “Equal-weight” rating on the stock after reviewing our model post FY17 (YE Mar-18) earnings.</p><div class="content-highlight"><p><strong>Drivers are in place to more than compensate for the revenue loss due to ongoing genericization of Kipres over the next 3-5 years, however…</strong></p></div><ul>
<li>In-licensed drugs from <a href="https://www.smartkarma.com/entities/1130" target="_blank" data-smartkarma-citation="entities:1130:1">Merck &amp; Co. Inc. (MRK US)</a> to contribute ¥28.9b by FY22e <ul>
<li>
<strong>Nasonex </strong>(mometasone, launched in 2008, allergic rhinitis, Nasal spray) was being co-marketed in Japan with MSD since 2016 until May 2018 when <a href="https://www.smartkarma.com/entities/15216" target="_blank" data-smartkarma-citation="entities:15216:1">Kyorin Holdings Inc (4569 JP)</a> announced to have obtained exclusive marketing rights from August 1, 2018. In addition, Kyorin also secured the rights to sell an authorised generic (AG). <ul>
<li>Given the arrangement and assuming an AG (approved, however NHI listing postponed twice) launch in Dec-2018, we project Nasonex FY18e sales of ~¥11b (MSD FY17 sales of ~¥16b).</li>
<li>With exclusive marketing rights for both branded and AG version, we expect Kyorin to be able to maintain sales of ¥8b by FY22 (approx. 70% of FY18e sales).</li>
</ul>
</li>
<li>
<strong>Desalex</strong> (desloratadine), Japan launch in FY16 for the treatment of allergy, to grow at FY17-22e CAGR of 19.8% to ¥12.1b</li>
<li>
<strong>KRP-114V</strong> (Vibegron, β3 receptor agonist), filed in Japan in Sep-2017 for the treatment of overactive bladder, to get approval in 2H FY18 with ¥8.7b sales contribution in FY22e</li>
</ul>
</li>
<li>In-house developed <strong>KRP-AM1977</strong> (Lascufloxacin, antibacterial agent for respiratory infection, filed in April 2017) is also expected to be approved in 1H FY18 and we project a ¥9.0b sales contribution in FY22e.</li>
</ul><div class="content-highlight"><p><strong>…gross margins between 50-55% (from the FY13-16 average of 60%) to become a new normal for Kyorin </strong></p></div><ul>
<li>Low margin generics business contribution has increased form ~13% of Kyorin’s topline in FY13 to ~25% in FY17 and is expected to be at around the same levels over the next 3-5 years.</li>
<li>Rx business growth, as discussed, is expected to be driven by, relatively lower margin, in-licensed drugs.</li>
<li>We project gross margins to bottom out at around 53% in FY19e followed by a gradual recovery to 55%, the new normal for Kyorin.</li>
</ul>

We reiterate our “Equal-weight” rating on the stock after reviewing our model post FY17 (YE Mar-18) earnings.Drivers are in place to more than compensate for the revenue loss due to ongoing genericization of Kipres over the next 3-5 years, however…
In-licensed drugs from Merck &amp; Co. Inc. (MRK US) to contribute ¥28.9b by FY22e 

Nasonex (mometasone, launched in 2008, allergic rhinitis, Nasal spray) was being co-marketed in Japan with MSD since 2016 until May 2018 when Kyorin Holdings Inc (4569 JP) announced to have obtained exclusive marketing rights from August 1, 2018. In addition, Kyorin also secured the rights to sell an authorised generic (AG). 
Given the arrangement and assuming an AG (approved, however NHI listing postponed twice) launch in Dec-2018, we project Nasonex FY18e sales of ~¥11b (MSD FY17 sales of ~¥16b).
With exclusive marketing rights for both branded and AG version, we expect Kyorin to be able to maintain sales of ¥8b by FY22 (approx. 70% of FY18e sales).



Desalex (desloratadine), Japan launch in FY16 for the treatment of allergy, to grow at FY17-22e CAGR of 19.8% to ¥12.1b

KRP-114V (Vibegron, β3 receptor agonist), filed in Japan in Sep-2017 for the treatment of overactive bladder, to get approval in 2H FY18 with ¥8.7b sales contribution in FY22e


In-house developed KRP-AM1977 (Lascufloxacin, antibacterial agent for respiratory infection, filed in April 2017) is also expected to be approved in 1H FY18 and we project a ¥9.0b sales contribution in FY22e.
…gross margins between 50-55% (from the FY13-16 average of 60%) to become a new normal for Kyorin 
Low margin generics business contribution has increased form ~13% of Kyorin’s topline in FY13 to ~25% in FY17 and is expected to be at around the same levels over the next 3-5 years.
Rx business growth, as discussed, is expected to be driven by, relatively lower margin, in-licensed drugs.
We project gross margins to bottom out at around 53% in FY19e followed by a gradual recovery to 55%, the new normal for Kyorin.


Drivers in Place to Ameliorate Revenue Decline, However, Reduced Gross Margins to Be the New Normal