Date: October 18, 2024
Broker: UOB Kay Hian Private Limited
Company Overview
CSPC Innovation Pharmaceutical Co is a producer of functional raw materials and health food, transforming into a leading drug innovator in China. The company is focused on advancing its pharmaceutical capabilities, including a strong emphasis on innovative drug development.
Recent Acquisition Proposal
CSPC Innovation has announced a proposal to acquire CSPC Baike for a total of Rmb7.6 billion. The transaction consists of a share consideration of Rmb6.84 billion and a cash consideration of Rmb760 million. To fund this acquisition, the company plans to issue shares to up to 35 specific investors to raise Rmb1.78 billion, which includes the amount needed for the cash consideration and additional funds for post-acquisition projects, such as R&D and industrialization efforts.
The acquisition is expected to enhance CSPC Innovation’s transformation into a true drug innovator, bringing an extensive GLP-1 pipeline and robust earnings potential. The deal is considered fairly valued, and its completion will lead to CSPC Baike becoming a major earnings contributor for CSPC Innovation.
R&D Achievements
CSPC Innovation has made notable progress in its R&D efforts, highlighted by the following developments:
- Omalizumab Biosimilar: The company received marketing approval in China for its omalizumab biosimilar, Enyitan, intended for treating urticaria.
- CPO301 Anti-EGFR ADC: The U.S. FDA granted Fast Track Designation to CPO301, a treatment for recurrent or metastatic squamous non-small cell lung cancer (sqNSCLC), indicating expedited review due to its potential to address an unmet medical need.
The company’s ongoing R&D efforts, especially in the GLP-1 and oncology spaces, underscore its long-term growth outlook, positioning it to capture significant market share in these segments.
Financial Performance & Valuation
CSPC Innovation’s financial outlook is promising, bolstered by potential synergies from the acquisition of CSPC Baike. Some key financial metrics include:
- Target Price: Rmb37.00 (Upside of 26.4% from the current share price of Rmb29.28)
- FY24 Net Cash/Share: Rmb1.35
- P/E Ratio: The company’s P/E is projected to improve significantly as it integrates CSPC Baike and grows its revenue base.
The acquisition price for CSPC Baike, Rmb7.6 billion, equates to a valuation of about 19.3x 2025F PE, which the report deems fair. Additionally, the valuation analysis uses a WACC of 12% and a terminal growth rate of 3%, resulting in a DCF-derived value of approximately Rmb7.8 billion.
Stock Performance & Major Shareholders
- Share Price Performance: The stock has seen a varied performance over the past year, with a 52-week high of Rmb40.62 and a low of Rmb17.71.
- Major Shareholder: CSPC Pharmaceutical Group holds a 73.6% stake in CSPC Innovation, underlining a strong backing from its parent company.
Risks and Challenges
The report identifies several risks that could impact CSPC Innovation’s future performance:
- Policy Risks: Potential negative effects from anti-corruption campaigns and group purchasing organization (GPO) tenders could pressure prices.
- R&D and Product Launch Risks: Challenges related to research, development, and new product launches may hinder growth.
- Competitive Pressure: The intensifying competition in the pharmaceutical sector could affect the company’s market position.
- M&A Risks: There are risks related to possible delays or failures in mergers, acquisitions, and collaborations.
Outlook and Recommendations
UOB Kay Hian maintains a “BUY” rating for CSPC Innovation, reflecting optimism about the company’s strategic direction, particularly its efforts to acquire CSPC Baike and strengthen its drug innovation capabilities. The broker highlights key stock price catalysts, such as:
- Successful completion of the CSPC Baike acquisition, which is anticipated to drive revenue and earnings growth from 2024 to 2026.
- Continued R&D achievements, including the launch of new innovative drugs, which could enhance the company’s portfolio and revenue streams.
The report concludes with a recommendation to maintain a target price of Rmb37.00, supported by favorable projections in the company’s revenue growth, successful integration of acquisitions, and advancements in innovative drug development.
