3sbio (1530 hk) china puti

of 27

19 Sep 2016

Wilfred Yuen

[email protected]

(852) 2235 7131

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

6.93/11.48

5.1

2,515

20,349

CITIC PE (28%)

Mr. Lou Jing (24%)

Blackrock (5%)

EY

FY16: Mar

Company description

3SBio is a leading biotechnology company in

China. The company focuses on oncology,

nephrology, and autoimmune diseases, and its

core products include TPIAO, EPIAO, and

Yisaipu. 3SBio is headquartered in Shenyang,

Liaoning Province and was listed in HKSE in

2015.

Price chart

Source: Bloomberg

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Domestic biotech leader; poised for continued growth

Rating Buy Initiation

Target Price HK$9.50

Current price

HK$8.09 Upside +17%

Emerging blockbusters in TPO, EPO, and Enbrel biosimilar 3SBio has three core products, namely TPIAO (rhTPO), EPAIO (rhEPO), and Yisaipu (“follow-on biologic” of Enbrel). TPIAO is 3SBio’s exclusive products, the only rhTPO product in PRC, where it is indicated for chemotherapy-induced thrombocytopenia (CIT) and immune thrombocytopenia (ITP). EPIAO is a market-leading anemia drug in China, where chronic kidney disease is a huge and growing problem. We see 3SBio is positioning the blood-boosting franchise for a long-term growth, given the company’s dual brand strategy (EPIAO + SEPO), complementary product offerings (IV iron sucrose and Sparin) for CKD disease management, and its pipeline’s long-acting EPO products. Yisaipu is a follow-on biosimilar drug of Pfizer’s Enbrel, a tumor necrosis factor (TNF) inhibitor indicated for rheumatoid arthritis. We model 30%, 8%, and 15% 3-year CAGR for TPIAO, EPIAO/SEPO, and Yisaipu, racking up RMB1.3bn, RMB0.9bn, and RMB1.3bn respectively in FY18E, accounting for c.80% of total sales.

Domestic biopharmaceutical leader with strong in-house sales As a domestic biotech pioneer, 3SBio is well positioned to benefit from the fast-growing biopharmaceutical industry in China, where it outpaces the growth of overall pharmaceutical industry and generates higher profit margins. Moreover, 3SBio’s sales and marketing team is sizable, supported by a team of over 1,800 sales rep and marketing staff (including a rheumatology team with over 500 personnel from Guojian), covering oncology, rheumatology, nephrology and dermatology. Sales of key products including TPIAO, EPIAO, Yisaipu rely on the company’s direct sales team.

mAb therapeutics are the next set of pipeline opportunities 3SBio is among the few Chinese drug companies with R&D capabilities in recombinant proteins and monoclonal antibody (mAb) therapeutics (a dominant class within biopharmaceuticals). The company commercialised its proprietary recombinant protein TPIAO in 2006. 3SBio has a pipeline of 38 product candidates, including 13 mAb therapeutics and two 2

nd generation EPO products. We believe

more mAb drugs to be included in the PDRLs (or the next NDRL) and lower costs driven by domestic biosimilar products will unleash the huge potential of mAb market in China.

Initiate at Buy with TP of HK$9.50 We initiate 3SBio with BUY rating and price target of HK$9.40 based on our 10-year DCF model. 3SBio is currently trading at 0.9x PEG vs. peers’ average of 1.1x. Our TP implies 1.1x PEG (or 23x FY17E P/E), in-line with peers’ average. We project 35% and 28% 3-year CAGR for revenue and net profit respectively

RMB mn FY14A FY15A FY16E FY17E FY18E

Revenue 1,131 1,673 2,821 3,581 4,136

Operating profit 343 402 842 1,076 1,259

Net profit 292 526 639 894 1,104

EPS (RMB) 0.15 0.23 0.25 0.36 0.44

P/E (x) 45.8 29.5 27.1 19.4 15.7

Sources: Company, CIRL estimates

3SBio (1530 HK)

China Puti

of 27

Emerging blockbusters in TPO, EPO, Enbrel biosimilar

Core leading products – EPIAO, TPIAO, and Yisaipu

3SBio primarily focuses on three therapeutic areas, including nephrology, oncology,

and autoimmune diseases. The company has three core products, namely 1) TPIAO

(rhTPO), 2) EPIAO (rhEPO), and 3) Yisaipu (Enbrel biosimilar).

Exhibit 1: Key products of 3SBio: 1) TPIAO, 2) EPIAO, and 3) Yisaipu

Exhibit 1:

* Treatment for thrombocytopenia category in IMS data; ^ Acquired through the acquisition of Guojian. Its sales will be consolidated from 2016.

Source: Company, CIRL

Exhibit 2: 3SBio’s key business development milestones


Product IndicationSales

(2015)

2012-15

Sales

CAGR (%)

Market

share

(2015)

no. of

competitorsHighlights

TPIAO

(特比澳)

1) Chemotherapy-induced thrombocytopenia (CIT)

2) Immune thrombocytopenia (ITP)RMB605mn 42% 41%* 0

The only approved rhTPO

product in China

EPIAO

(益比奧)

1) Anemia associated w ith chronic kidney disease (CKD)

2) Chemoptherapy-induced anemia (CIA)

3) Reduction of allogeneic blood transfusion

in surgery patients

RMB684mn 25% c.40% 10+

The only rhEPO product

approved for three

indications in China

Yisaipu^

(益賽普)

1) Rheumatoid arthritis

2) Plague psoriasis

3) Ankylosing spondylitis

RMB847mn 10% 65% 5 First-to-market drug

Year Milestone

1993 Shenyang Sunshine, the company's major operating subsidiary, w as established

1998 EPIAO w as launched

2002 EPIAO became the no.1 rhEPO product in China in terms of both sales volume and revenue

2005 TPIAO w as approved by CFDA

2006 Obtained a 5-year exclusive licnese to distribute IV Iron Sucrose

2007 Listed on NASDAQ

2010 Expansion of manufacturing capacity of EPIAO and TPIAO by 4x

2011 Upgrade of EPIAO manufacturing specif ications to fully align w ith EU standard

2013 Delisted from NASDAQ

2014 Acquired Shenzhen based biopharma Sciprogen and Italy based Sirton

2015 Acquired Zhejiang Wansheng. Listed on the HKEx.

2016 Acquired Guojian, a domestic industry leader in mAb therapeutics

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TPIAO – platelet boosting drug with strong growth potential due to exclusivity

and low penetration

3SBio’s TPIAO is the only rhTPO (recombinant human thrombopoietin) product in the

PRC market. TPO (thrombopoietin) is a human hormone largely produced by the liver

which regulates platelet production. A decrease of platelets present in the blood is a

disorder (aka thrombocytopenia) which can lead to abnormal bleeding. Therefore,

TPIAO, a genetically engineered glycosylated TPO with similar pharmacological

functions as endogenous TPO, is used to increase platelet count. TPIAO has been

approved by the CFDA for two indications: 1) chemotherapy-induced

thrombocytopenia (CIT) and 2) immune thrombocytopenia (ITP). As the only rhTPO

product in the PRC market, TPIAO does not face direct competition in China, whereas

it competes with other treatments for CIT and ITP. In the CIT market, TPIAO

competes with rhIL-11 and platelet transfusion. In the ITP market, alternative

treatment methods include corticosteroids, intravenous immunoglobulin, splenectomy

and certain chemical drugs.

Exhibit 3: Sales of TPIAO (FY09-15)


TPIAO has experienced significant sales growth due to increasing patient demand

and physician acceptance, with sales increasing from RMB129mn in FY10 to

RMB605mn in FY15, representing a 5-year CAGR of 36%. We expect sales growth of

TPIAO to maintain at 25%+ in the next 3 years, due to:

1) Volume growth, low penetration, large patient population: Annual new cancer

cases increased from 3.1mn in 2010 to 3.4mn in 2014, according to China’s

National Central Cancer Registry (NCCR). The prevalence rate of CIT among

chemotherapy patient was 18% and the no. of CIT patients reached ~0.5mn in

2012. Despite growing rapidly, the penetrations of TPIAO in both the CIT and ITP

market are still low (at ~10%), according to the company. TPIAO is on the NRDL

Category B, with no. of provincial RDL increased from 4 in 2011 to 7 in 2015. We

expect more provinces to add TPIAO into the medicine catalogues in their

44%

28%

28%

49%

42%

36%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013 2014 2015

Sales of TPIAO (RMB mn) Growth Rate (% YoY)

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upcoming tenders. TPIAO currently cover 1,300+ hospitals (including around 800

Class III hospitals), and the majority of the sales is generated from ~10% of the

hospitals coverage. Sales of TPIAO was up by 37% YoY to RMB405mn in 1H16,

driven by ~50 hospitals where they registered 70%+ sales growth, according to

the company. The company expects to further deepen the penetration of TPIAO

and boost sales in hospitals within its existing coverage.

2) Minimal pricing pressure due to exclusivity: TPIAO faces no direct competition

in China, and we project annual price cuts of 1-2% for TPIAO.

3) Market share gain from similar drugs: TPIAO’s share by sales in the PRC CIT

drug market increased from 30.3% in 2011 to 33.8% in 2013, according to Frost

and Sullivan. We expect TPIAO will continue to gain market shares, due to

improving physicians’ awareness of the safety and efficacy of TPIAO for CIT

treatment.

4) Potential expansion of approved indications, such as leukaemia,

sepsis-induced thrombocytopenia and aplastic anemia.

Exhibit 4: TPIAO is approved for two indications: 1) CIT and 2) ITP


Exhibit 5: Penetration of TPIAO on CIT in China (2013) Exhibit 6: Penetration of TPIAO on ITP in China (2013)

Exhibit 2:

Source: Company, Frost & Sullivan, CIRL Source: Company. Frost & Sullivan, CIRL

Indication of TPIAOLaunch

YearReimbursement

Chemotherapy-induced thrombocytopenia (CIT) 2006

NRDL Category B (w ork-related injuries)

7 provincial RDL (Hainan, Heilongjiang, Jilin,

Liaoning, Shaanxi, Shanghai and Tibet)

Immune thrombocytopenia (ITP) 2011 1 provincial RDL (Tibet)

490,000

220,000

22,000

0

100,000

200,000

300,000

400,000

500,000

600,000

no. of CIT patients CIT patients needed rhTPO

therapy

CIT patients received rhTPO

therapy

Penetration rate at ~10%

110,000

77,000

9,350

0

100,000

200,000

300,000

400,000

500,000

600,000

no. of ITP patients ITP patients aged over 60

ITP patients received rhTPO

therapy

Penetration rate at less than 10%

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TPIAO for the treatment of CIT:

CIT (chemotherapy-induced thrombocytopenia) is a clinical syndrome of platelet

deficiency induced by chemotherapy. Compared to rhIL-11, rhTPO has higher efficacy,

faster increases in platelet levels and fewer side effects, according to Frost and

Sullivan.

TPIAO for the treatment of ITP:

ITP (immune thrombocytopenia) is an autoimmune bleeding disease due to low

platelet count (thrombocytopenia). The cause of ITP is still unknown. According to

Frost and Sullivan, approximately 110,000 patients in China needed ITP treatment in

2013 (more than 70% were 60 years or above), whereas the penetration of rhTPO

was less than 10%. rhTPO therapy is recognised by the Chinese Experts’ Consensus

on the Chinese Experts’ Consensus on the Diagnosis and Treatment of Adult Primary

Immune Thrombocytopenia (Revised) (成人原發免疫性血小板減少症診治的中國專家

共識（修訂版）) as a treatment with low side effects, especially the elderly ITP patient

who are more sensitive to hormone therapies (a major primary treatment of ITP due to

its high efficacy and low cost).

Minimal price decline due to TPIAO’s exclusivity

Due to its exclusivity (recognised as a National Class I New Drug), the pricing

pressures of TPIAO due to provincial tenders have been minimal. According to the

company, Tianjin’s tender in 1H16 saw only 1-2% price declines.

Exhibit 7: Tender prices of TPIAO (RMB per 15,000 IU)

Source: Provincial drug tender websites, Yaozh.com, CIRL

Province 2009 2010 2011 2012 2013 2014 2015 2016Tender price

change (%)

Beijing 1,082 1,084 0%

Shanghai 1,119 NA

Guangdong 1,099 1,064 1,064 -3%

Hunan 1,140 NA

Tianjian 1,123 NA

Zhejiang 1,140 1,008 -12%

Fujian 1,008 NA

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EPIAO – market leading anemia drug in China, where chronic kidney disease is

a huge and growing problem

EPIAO is a “follow-on biologic” of Epogen, the rhEPO (recombinant human

erythropoietin) product originally developed by Amgen (AMGN US) as one of the most

successful biotech drug in history. EPO (erythropoietin) is a growth factor that

stimulates the production of red blood cells. Individuals with chronic kidney disease

(CKD) suffer from anemia (a deficiency in red blood cell count) because they do not

produce sufficient amounts of erythropoietin, which is normally produced in healthy

kidneys. Anemia can also result from chemotherapy for patients with non-myeloid

malignancies. Therefore, EPO drug is intended for anemic kidney or oncology patients,

and is considered to be an alternative to blood transfusions. Global sales of rhEPO

products reached US$8.8bn in 2013, according to IMS.

In China, 3SBio’s EPIAO is the dominant leader in the rhEPO market and is the only

rhEPO product approved by the CFDA for all three indications, including i) anaemia

associated with CKD, ii) chemotherapy-induced anaemia (CIA), and iii) the reduction

of allogeneic blood transfusion in surgery patients.

EPIAO is mainly sold to Grade III hospitals, with costs for the treatment for anaemia

associated with CKD per patient at around RMB4,000-5,000 per year. In Dec 2014,

3SBio acquired another rhEPO product, namely SEPO, through the acquisition of

Sciprogen. 3SBio will use SEPO to capture growth in the lower-tier market, where we

expect to see a larger volume growth vs. the overall rhEPO market given its lower

penetration.

Exhibit 8: EPO market in PRC Exhibit 9: Top 10 players in EPO market in PRC (2013)

Exhibit 3:

Source: Frost and Sullivan Source: Frost and Sullivan

EPIAO’s sales increased from RMB251mn in FY10 to RMB684mn in FY15,

representing a 5-year CAGR of 28%. Despite pricing pressure amid provincial tenders,

we expect volume growth for 3SBio’s EPO products to remain robust at 15%+ in the

next 3 years:

1) Large CKD patient population, significantly undertreated: The no. of patients

43.6%

14%10%

7%4% 4% 3% 3% 3% 3%

5%

0%

10%

20%

30%

40%

50%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2009 2013 2018E

RMB mn

CKD associated anemia Chemotherapy-induced anemia

Allogeneic blood transfusion

614

1,264

2,955

2009-13 CAGR: 20%

2013-18E CAGR: 18%

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with CKD in China is estimated to be about 120mn in 2012, and only 18% were

treated in hospitals vs. 70% in the US. We expect no. of dialysis patients in China

to grow at 15%+ in 2016-18, which results in volume growth of rhEPO products.

2) Low penetration in oncology segment: The no. of patients suffering from CIA

was 1.6mn in China in 2013, according to Frost and Sullivan. Despite having such

an equally large patient population vs. ESRD (end-stage renal disease) patients,

the ratio between EPO used in renal dialysis and in chemotherapy is 3:1,

according to the company’s EPIAO sales breakdown. We believe the EPIAO’s

oncology sales will grow at a faster rate than that of nephrology, thanks to its low

base and an expanding insurance coverage for cancer treatments in China. We

expect more oncology drugs will be included in the next version of NRDL and

provincial critical illness insurance schemes (大病醫保), which will drive the uses

of EPO therapy for oncology patients.

3) 3SBio will maintain its dominant position in the PRC rhEPO market due to i)

EPIAO’s superior quality: according to a study sponsored by Amgen in Sep 2008,

EPIAO was one of the most similar to Epogen in terms of biochemical and

biophysical properties, ii) EPIAO’s additional indications (for oncology and surgery

patients, which representing c.30% of total revenue of EPIAO, according to the

company), iii) strong branding: 3SBio also provides complementary product

offerings, namely IV iron sucrose and Sparin for CKD disease management.

4) Dual brand strategy (EPIAO + SEPO): 3SBio will use SEPO to capture volume

growth in lower-tier market and/or provinces where tender price cuts are severe.

In 1H16, the company replaced EPIAO by SEPO in Fujian and Hubei, which

resulted in sales drop in these two provinces over this transition period. Despite

the overall EPO sales growth in 1H16 was affected (+1.1% YoY), we believe this

strategy will also help EPIAO to mitigate pricing pressure in upcoming tenders as

its sales will continue to target Class III hospitals, and expect the EPO franchise to

reinvigorate double digit growth in FY17E and FY18E.

Exhibit 10: Sales of EPIAO and SPEO (FY14-18E)

Source: Company, CIRL estimates

24.1%

22.4%

3.2%

10.0% 10.2%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

900

1,000

2014 2015 2016E 2017E 2018E

EPIAO (RMB mn) SEPO (RMB mn) Growth Rate (% YoY)

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Exhibit 11: EPIAO was the only rhEPO product approved for all three indications in China

Source: CFDA, CIRL

Exhibit 12: Tender prices of EPIAO (RMB per 10,000 IU)

Source: Provincial drug tender websites, Yaozh.com, CIRL

Indication 1: Indication 2: Indication 3:

CKD-associated

anemia

Chemotherapy

induced

anemia

Allogeneric blood

transfer

3SBio 44%Approved

(1998)

Approved

(2001)

Approved

(2000)

Hayao Biological 14%Approved

(2005)- -

Shanghai Chemo 10%Approved

(1998)- -

Beijing Sihuan 7%Approved

(2000)- -

Huabei NCPC Genetech 4%Approved

(2000)

Approved

(2015)-

Sciprogen 3%Approved

(2001)

Approved

(2001)-

Market

Share

(2013)

Company

Province 2009 2010 2011 2012 2013 2014 2015 2016Tender price

change (%)

Beijing 114 NA

Shanghai 114 NA

Guangdong 116 98 98 -15%

Hunan 115 98 -14%

Tianjian 103 NA

Zhejiang 101 NA

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Chronic kidney disease is a huge and growing problem in China

The number of patients with chronic kidney disease in China is estimated to be about

120mn in 2012, with an overall prevalence rate of 10.8% among the adult population,

according to a state-fund study in The Lancet. The large patient population is due to

the ageing population, increasing life expectancy of CKD patients and increasing

prevalence of chronic disease such as diabetes. Another study from China Insights

Consultancy estimates that only 18% of renal disease patients in China were treated

in hospitals vs. 70% in US in 2012.

In 2012, the no. of patients of late-stage CKD (who needed dialysis treatment and

therefore rhEPO therapy) was 1.4mn, representing 1.2% of all CKD patients in China.

Despite a rapid growth in the no. of patients undergoing dialysis in China (2013:

16.4% YoY; 2014: 17.5% YoY), China’s prevalence of dialysis per million population

was only 245 in 2013, the lowest amongst the five countries with the largest dialysis

patient population. We expect dialysis patients in China will grow from 0.33mn in 2013

to 0.67mn in 2018E, representing a 5-year CAGR of 15%.

Exhibit 13: Dialysis patient growth by country 2013 vs 2012 Exhibit 14: Prevalence of dialysis (per million population) in 2013

Exhibit 4:

Source: Fresenius Medical Care, CIRL Source: Fresenius Medical Care, CIRL

1.3%

2.7%

3.2%

4.0%

4.6%

5.0%

9.3%

9.6%

11.6%

12.9%

13.1%

14.8%

14.9%

16.4%

18.7%

0% 5% 10% 15% 20%

Japan

New Zealand

Australia

Taiwan

South Korea

Hong Kong

Sinagapore

Malaysia

Philippines

Vietnam

Thailand

Indonesia

Pakistan

China

India

245

575

820

2,505

1,420

0

500

1,000

1,500

2,000

2,500

3,000

China Brazil Mexico Japan US

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Exhibit 15: Treatment rate of renal diseases to double from 18% in 2012 to 36% in 2018E

Source: China Insights Consultancy, CIRL

EPO franchise supported by complementary products for CKD disease management:

IV iron sucrose is indicated for the treatment of iron deficiency anemia and can be

prescribed in combination with EPIAO for late-stage CKD patients. Developed by

Shenyang Borui Pharmaceutical in 2005, 3SBio obtained the exclusive distribution

rights for IV iron sucrose in May 2006. The company markets and sells IV iron sucrose

to over 1,100 hospitals in China through its in-house sales team. Sales of IV iron

sucrose increased from RMB17mn in FY10 to RMB82mn in FY15, representing a

5-year CAGR of 37% (vs. EPIAO’s 22%).

Sparin, an injectable LMWH-Ca (low-molecular-weight heparin calcium) product, was

acquired from Sciprogen in Dec 2014. It is indicated for the prevention of blooding

clotting during dialysis (as well as the treatment of deep vein thrombosis). Compared

to standard heparin, LMWH-Ca has the advantages of lower side effect and more

predictable anticoagulant response. Launched in 2006, Sparin was included in the

EDL and NDRL (Category B). Sales of Sparin in FY15 was RMB49mn.

Developing long-acting rhEPO product to target pre-dialysis patients

3SBio are developing two second-generation rhEPO product candidates, namely

NuPIAO and PEG-EPO, with extended circulating half-life and increased biologic

activity as compared with first-generation rhEPO products, thereby allowing for less

frequent administrations. The company expect NuPIAO to be the first long-acting EPO

to be launched in China in 2020, which will target pre-dialysis patients. The company

expects peak sales of over RMB1bn. The global market size of long- and short-acting

EPO is approximately 1:1.5, according to IMS data.

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

20

40

60

80

100

120

140

160

180

200

2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E

no. of non-treated renal disease patients in China (mn)

no. of treated renal disaese patients in China (mn)

Rate of treatment (%)

Treatment rate to double from 18% in 2012 to 36% in 2018E

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Yisaipu – the first-to-market biologic agents to treat RA in China

Yisaipu is a “follow-on biologic” of Pfizer’s Enbrel, a tumor necrosis factor (TNF)

inhibitor. 3SBio acquired Yisaipu through the acquisition of Guojian. Yisaipu is

indicated for 1) rheumatoid arthritis (RA), 2) plaque psoriasis, and 3) ankylosing

spondylitis (AS). According to IMS data, Yisaipu had a dominant market share of

64.9% in China in 2015 (2013: 61.0%).

Exhibit 16: TNF inhibitor drugs in PRC

Source: CFDA, FDA, CIRL

Yisaipu is sold at 50%+ discount compared with the originator product in China.

Treatment cost for a 3-month prescription is around RMB24k. Sales of Yisaipu in

FY15 and 1H16 were up 15.4% and 16.5% YoY to RMB847mn and RMB446mn

respectively. We model sales growth of Yisaipu to maintain at 15%+ in the next 3

years, due to:

1) Biologic therapies are fast catching up in China: Due to its better efficacy and

fewer side effects, biologics are growing fastest among all treatment options

(including NSAIDs, DMARDs, steroids, and biologics) in both the Chinese and

global market for treatment rheumatic autoimmune diseases (including RA, gout,

osteoarthritis etc.). Its market share in China was increased from 11% in 2008 to

19% in 2013, according to Guangzhou Biao Dian Medical Data. Despite growing

rapidly, its market share in rheumatoid autoimmune diseases was still significantly

lower compared to the prescription pattern in the global market where biologics

account for over 40% of market share.

2) Lower sales base and low penetration of TNF inhibitors: Rheumatoid arthritis

(RA) is a common rheumatoid autoimmune disease and is one of the largest

treatment areas by sales in the global market. Among the top five best selling

drugs in the world, three are TNF inhibitors, namely Humira, Enbrel, and

Remicade, for the treatment of RA, with their total sales of US$31bn in 2015. We

estimate that the TNF inhibitor market in China was c.RMB2bn in 2015 (vs.

US$35bn in the global market), and its penetration rate is only ~1% among the

5mn RA patients in China, due to high cost compared to non-biologic DMARDs

(e.g. monthly Rx cost of Etanercept is ~RMB8,000 vs. ~RMB400 for leflunomide).

3) Benign competitive landscape: There are only three domestic manufacturers

and three imported products in the TNF inhibitor market in China. Due to cost

advantage, domestic products occupies c.85% of the market share, and the

market share of Yisaipu was 64.9% in 2015 (2014: 61.0%) according to IMS data.

ProductChinese

nameCompany Generic name

Approval

year

by US FDA

Launch

year

in China

Yisaipu 益赛普 CP Guojian rh-TNF α receptor II - IgG Fc fusion protein NA 2005

Qiangke 强克 Celgen Biopharma rh-TNF α receptor II - IgG Fc fusion protein NA 2011

AnBaiBNuo 安佰诺 Zhejiang Hisun rh-TNF α receptor II - IgG Fc fusion protein NA 2015

Remicade 类克 JNJ/Merck Infliximab 1998 2007

Enbrel 恩利 Pfizer/Amgen Etanercept 1998 2010

Humira 修美乐 AbbVie Adalimumab 2002 2010

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Due to its favourable competitive landscape, we expect mild pricing pressure of

Yisaipu, with 2-3% annual price decline in the next 3 years.

4) More insurance coverage with more provincial RDL or the next NDRL:

Yisaipu is currently listed in provincial RDLs of seven provinces, including Hainan,

Guangdong, Shanxi, Tibet, Gansu, Hunan, and Shanghai. Given a large RA

patient population (with chronic disabling conditions), we believe more provinces

(or the next NDRL) will provide insurance coverage for Yisaipu, given 1) an

increasing physician awareness of the safety and efficacy of TNF inhibitors and 2)

its cost effectiveness vs. originator products.

Exhibit 17: The 10 best selling drugs in 2015

Source: FirstWorldPharma, PharmaCompass, CIRL

Rheumatoid Arthritis

Rheumatoid arthritis (RA) is a chronic autoimmune disease and the syndrome

includes persistent synovial inflammation and associated articular damage. The global

prevalence of RA was 0.24%, according to The Global Burden of Disease 2010 study.

In China, the prevalence rate of RA is approximately 0.32% to 0.36%, or 4.5mn to

5.0mn patients.

Biologic therapies are fast catching up in China

Similar to the US, the current therapeutic market to treat autoimmune rheumatic

diseases (including RA, gout, osteoarthritis etc.) in China includes i) anti-inflammatory

and analgesic drugs (NSAIDs), ii) hormones, iii) disease-modifying anti-rheumatic

drugs (DMARDs), iv) biological agents. Due to better efficacy and fewer side effects,

biologics are growing fastest among all treatment options and its market share in

China was increased from 11% in 2008 to 19% in 2013.

Top Brand Name CompanySales in 2015

(US$bn)Indication Remarks

1 Humira Abbvie 14.0 Autoimmune diseasesmAb

(TNF inhibitor)

2 Harvoni Gilead 13.9 Hepatitis CNS5A inhibitor

NS5B inhibitor

3 Enbrel Pfizer / Amgen 8.7 Autoimmune diseasesFusion protein

(TNF inhibtor)

4 Remicade JNJ / Merck 8.4 Autoimmune diseasesmAb

(TNF inhibitor)

5 Rituxan Roche / Biogen 7.1 Oncology mAb

6 Lantus Sanofi 7.0 Diabetes Insulin analogue

7 Avastin Roche 6.8 Oncology mAb

8 Herceptin Roche 6.6 Oncology mAb

9 Prevnar Pfizer 6.2 Streptococcus pneumoniae Vaccine

10 Revlimid Celgene 5.8 Blood related disorders Thalidomide derivative

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Exhibit 18: Market share of rheumatic autoimmune disease drugs Exhibit 19: Scale of hospital sales in 2012 and 2013

Exhibit 5:

Source: Guangzhou Biao Dian Medical Data Source: Guangzhou Biao Dian Medical Data

Exhibit 20: Prescription pattern of rheumatic autoimmune diseases in China (2008 vs. 2013)

Source: Guangzhou Biao Dian Medical Data

517 589

366 401

302 334

244

312

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013

US$mn

Anti-inflammatory and analgesic drugsSteroidsDMARDsBiological agents

10%

11%

28%

14%

Overall growth rate: 14% YoY

Anti-inflammatory

and analgesic

drugs

36%

Steroids25%

DMARDs20%

Biological agents

19%

Prescription pattern of rheumatic autoimmune diseases in PRC (2013)

11%

19%

42%

36%

0%

10%

20%

30%

40%

50%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008 2013

RMB mn

NSAIDs Steroids

DMARDs Biological agents

Market share of biologics (%) Market share of NSAIDs (%)

Market share of Steroids (%) Market share of DMARDs (%)

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Domestic biopharmaceutical leader with strong in-house sales

A sizable in-house salesforce

3SBio has an in-house force of ~1,800 sales and marketing employees (including 500

from Guojian). Sales of TPIAO, EPIAO and IV Iron Sucrose rely on a dedicated team

of ~1,300 members covering 1,260 Grade III hospitals and 3,090 Grade II or lower

hospitals and medical institutions. ~500 sales and marketing employees in Guojian

are responsible for Yisaipu and Xenopax, covering 1,600 hospitals (including 1,002

Grade III hospitals). As a result, sales of key products including EPIAO, TPIAO,

Yisaipu (accounting for c.80% of total sales) rely on the company’s direct sales team.

3SBio also replies on third-party promoters to market and distribute other products,

such as SEPO, Sparin, Intefen and Inleusin.

Exhibit 21: 3SBio’s core products are sold through its in-house sales force


Distribution channel Products

In-house sales and marketing TPIAO, EPIAO. IV Iron Sucrose, Yisaipu, Xenopax

Third-party promoters SEPO, Sparin, Intefen, Inleusin, Gan Xin, Si, Qu Di, Rui Si Yi, Wan Wei

724

1,800

421 462

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2014 2015

Sales and marketing team (no. of employees) no. of third-party promoters

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Recent M&A activities

3SBio has used M&A to 1) add products which it leverages its current sales force to

sell (IV Iron Sucrose), 2) expand distribution network in fast growing lower-tier PRC

market (SEPO), 3) expand product offerings (Yisaipu) and pipeline (mAbs in Guojian

and small molecules in Wansheng), and 4) gain footing in Europe (Sirton

Pharmaceuticals SpA ).

Exhibit 22: Recent 3SBio M&A activities


Exhibit 23: 3SBio’s in-licensing products


Date Target Deal structure Deal Value Target Specialty

Dec 2014 Sciprogen Acquired 100% stake ~RMB560mnExpand distribution netw ork in fast-

grow ing low er-tier PRC market

Dec 2014 Sirton Acquired 100% stake ~RMB220mnContracted-based manufacturer based

in Italy, specialising in injectable products

Jul 2015 Wansheng Acquired 100% stake RMB528mn Oncology and dermatology

Mar 2016 Guojian Acquired 97.8% stake RMB6,329mn Leading mAb development in China

YearIn-licensing

productsGeneric name Indications Acquired from Sales (FY15)

2006 IV Iron Sucrose Iron Sucrose Deficiency anemia Shenyang Borui RMB81.6mn

2012 Gan Xin Metadoxine Alcoholic liver disease Shandong Qidu NA

2014Si Qu Di, Rui Si Yi,

Wan Wei

Docetaxel, anastrozole,

azasetronOncology Zheijing Wan Sheng NA

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Biopharmaceutical industry in PRC – low penetration, higher profit margins

The biopharmaceutical industry in China is still at its nascent stage with strong growth

potential. According to IMS, the PRC biopharmaceutical market reached RMB27bn in

2013 and is expected to grow at a CAGR of 18% to reach RMB62bn in 2018. The

PRC biopharmaceutical market accounted for 5.4% of the overall PRC

pharmaceutical market in 2013 vs. 11.7% for the overall global pharmaceutical market.

Due to higher technological barriers, there are only ~130 companies in

biopharmaceutical industry vs. 4,000+ companies in chemical pharmaceutical industry

in China in 2013, according to Frost and Sullivan. Moreover, according to the data

from the SFDA South Institute, profit margins of the sub-segment biological drug

products were 2-3ppt higher than that of the overall PRC pharmaceutical market

during 2008-12.

Exhibit 24: Biopharmaceutical sales as % of overall drug market Exhibit 25: Profit margins of PRC pharma industry vs. biologics

Source: Frost and Sullivan Source: SFDA South Institution

Exhibit 26: PRC biopharmaceutical market size (2009-18)

Source: Guangzhou Biao Dian Medical Data

10.7%11.0% 11.7% 10.9%

10.2%

12.5%

13.7%14.8%

13.8%13.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2008 2009 2010 2011 2012

Profit margin of PRC pharmaceutical industry (%)

Profit margin of PRC biological drug preparation products sub-segment (%)

5.4%

11.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

PRC Global market

Biopharmaceuticals accounted for 5.4% of overall PRC drug markt vs. 11.7% in global market

44%

28%

28%

49%

42%

36%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013 2014 2015

Sales of TPIAO (RMB mn) Growth Rate (% YoY)

of 27

mAb therapeutics are the next set of pipeline opportunities

Monoclonal antibodies (mAb), the dominant class within biopharmaceuticals

Monoclonal antibodies (mAb) are monospecfiic antibody against a specific epitope on

an antigen made by identical immune cells that are all cones of a unique parent cell, in

contrast to polyclonal antibodies which are made from several different immune cells.

This class of biopharmaceutical products has experienced explosive growth since the

commercialisation of the first mAb product in 1986 and several mAbs have reached

blockbuster status. In 2015, mAbs accounted for five of the 10 top-selling drugs

(Exhibit 17) and over $75bn in annual sales worldwide, representing approximately

half of the total sales of all biopharmaceutical products. According to BCC Research,

the market for mAb products will be nearly $90bn by 2017.

In China, the market for mAb products was RMB7bn in 2015, according to Asiachem

BioPharma (亚化生物). MNCs dominate the mAb products, with over 80% market

share. We believe more mAb drugs to be included in China’s insurance

reimbursement i.e. PDRLs (or the next NDRL) and lower costs driven by domestic

biosimilar products will unleash the huge potential of mAb market in China.

3SBio is among the few Chinese drug companies with R&D capabilities in

recombinant proteins and mAb therapeutics

The company currently has a R&D team of 380 staff, focusing on the discovery and

development of biopharmaceuticals. 3SBio is among the few Chinese drug companies

with R&D capabilities in recombinant proteins and mAb therapeutics. The company

commercialised its proprietary recombinant protein TPIAO (a National Class I New

Drug) in 2006. 3SBio has a pipeline of 38 product candidates, including 13

monoclonal antibody (mAb) therapeutics and two second-generation rhEPO products.

The company has 11 antibody production lines with over 38,000 liter capacity. To

leverage on its mAb manufacturing capacity, the company plans to develop CMO

business in the coming years, as an additional business line for the company.

of 27

Exhibit 27: 3SBio has a pipeline of 38 product candidates, focusing on nephrology, oncology and auto-immune diseases

* Ascentage's product. 3SBio has ROFR for China's market. ^ New indication for a commercialised product


Key mAb product candidates:

Ipterbin (Trastuzumab)

Ipterbin is a biosimilar to Roche’s blockbuster Trastuzumab, brand name Herceptin.

Herceptin was the first mAb approved by FDA in 1998 for the treatment of Her2+

metastatic/ early stage breast cancer. Global sales of Herceptin was US$6.6bn in 2015.

In China, Herceptin was marketed in 2002. Herceptin is on six provincial RDLs,

including Guangxi, Jiangsu, Ningxia, Jiangxi, Hunan, and Zhejiang. In 2015, there were

272,000 newly detected breast cancer cases, according to the statistics from the cancer

registry compiled by NHFPC. We estimate the penetration rate and market size for

Herceptin in China was 28% and RMB2.25bn respectively in 2015, assuming 1)

average cost per patient at RMB150,000 and 2) no. of patients received Herceptin

treatment was ~15,000 vs. 54,400 patients with HER2-positive breast cancer (20% of

2015 newly detected cases). Due to high treatment cost, penetration of Herceptin in

China is still low. We expect Herceptin biosimilar manufactured by domestic

manufacturers with cost advantage and increasing insurance reimbursement coverage

will unleash the huge potential of the PRC market.

In May 2016, 3SBio voluntarily withdrew an NDA for Ipterbin, due to new CFDA policies

Therapeutic Area Product Candidate Intended IndicationDevelopment

Status

Target Launch

Year

Cinacalcet hydrochloride Hyperparathyroidism Pre-clinical 2019

Sevelamer carbonate Hyperphosphatemia Pre-clinical 2019

Colestilan Hyperphosphatemia, Hypercholersteremia IND 2018

Ferric citrate Hyperphosphatemia IND 2019

NuPIAO Anemia associated w ith CKD Phase I 2020

Voclosporin Lupus nephritis IND 2021

PEG-EPO Anemia associated w ith CKD IND 2023

HIF-PH inhibitor Anemia Pre-clinical 2024

DJ5 Autosomal dominant polycystic kidney disease Pre-clinical 2024

TAS102 Colorectal cancer IND 2019

IAP inhibitor* Solid tumors Phase I 2020

PEG-Irinotecan Solid tumors IND 2021

Bcl-2/kl inhibitor Solid tumors and luekemia Pre-clinical 2021

Leukotuximab Acute leukemia Pre-clinical 2025

Tanibirumab Cancer Pre-clinical 2027

DIG-KT Cancer Pre-clinical 2028

ALT-P7 Cancer Pre-clinical 2027-2028

Trastuzumab Metastatic breast cancer, metastatic stomach cancer NDA 2017

Rituximab non-Hodgkin lymphomas NDA 2020

Bevacizumab Non-small cell lung cancer, Age-related macular degeneration IND 2023

TDM-1 Metastatic breast cancer Pre-clinical 2024

Cetuximab Metastatic colorectal cancer CTA 2022

Nadroparin calcium Thrombosis, Blood clotting IND 2018

Eltrombopag ITP IND 2018

TPIAO^ Aplastic anemia Pre-clinical 2019

Fondaparinux sodium Prophylaxis of deep vein thrombosis Pre-clinical 2019

Trelagliptin succinate Diabetes IND 2019

Anti-TNF α mAb Rheumatoid arthritis Phase I 2022

Pegsiticase Gout IND 2023

Apremilast Psoriatic arthritis IND 2020

Abatacept Rheumatoid arthritis (RA) NDA 2020

Fluid acupunture therapy w ith Yisaipu RA, plague psoriasis and ankylosing spondylitis NDA 2019

Fluticasone Propionate Pruitus ANDA 2016

Fexofenadine Seasonal allergic rhinitis; chronic idiopathic urticaria Phase I 2017

Clindamycinphosphae Tretinoin Gel Acne vulgaris Phase III 2019

Calcipotriol Betamethasone Ointment Plaque psoriasis Pre-clinical 2019

Desonide Dermatitis Pre-clinical 2019

Inflammation Anti-il-17 antibody Inflammation Pre-clinical 2024

Nephrology

Dermatology

Auto-Immune

Diseases

and Other Areas

Oncology

of 27

(that require sponsors to self-inspect and validate clinical data) instituted in Jul 2015.

The company will try to re-submit the clinical trial data of Ipterbin to the CFDA by

2016-17 and expect product approval in 2017-19. There are seven other domestic

companies developing Herceptin biosimilar, which are currently in the stage of clinical

trials, including i) Genor Biopharma’s GB221 in phase II and ii) Henlius Biotech’s HLX02

in phase I.

Jiantuoxi (Rituximab)

Jiantuoxi is a biosimilar to Roche’s blockbuster Rituximab, brand name Rituxan. It is a

mAb against the protein CD20, used for the treatment of many lymphomas, leukaemia,

transplant rejection, and autoimmune diseases. Global sales of Rituximab was

US$7.1bn in 2015. In China, Rituxan was marketed in 2000. According to market

researcher Sinohealth Intelligence, its sales in China was RMB1.6bn in 2015.

Anti-EGFR mAb (Cetuximab)

This is a biosimilar to Bristol-Myers Suibb’s Cetuximab, brand name Erbitux. Erbitux is

used for the treatment of metastatic colorectal cancer (CRC), metastatic non-small cell

lung cancer and head and neck cancer (HNC). Global sales of Erbitux was US$1.4bn

in 2015, according to data from Thomson Reuters.

In China, the incidence rates for CRC and thyroid cancer (one type of HNCs) were

33.1 cases and 11.9 cases, respectively, per 100,000 persons in 2012, according to

Report of Cancer Incidence and Mortality in China, 2012 (Chen, et al. 2016). 3SBio

received approval of IND application of its anti-EGFR mAb product from the CFDA in

Aug 2016 and expects the clinical trials to start in late 2016.

Key pipeline products on nephrology:

NuPIAO and PEG-EPO are 3SBio’s two second-generation rhEPO product

candidates, with extended circulating half-life and increased biologic activity as

compared with first-generation rhEPO products, thereby allowing for less frequent

administrations. According to the company, preliminary testing of NuPIAO

demonstrated an enhanced half-life comparable to that of Amgen’s Aranesp, whereas

the pre-clinical animal model for PEG-EPO had shown that its efficacy and

pharmacokinetics are comparable to Roche’s Mircera.

Key pipeline products on autoimmune disease:

Pegsiticase is a modified pegylated recombinant uricase derived from candida utilis,

which are developing for the treatment of refractory gout and hyperuricemia. The

product candidate was acquired from EnzymeRx LLC for a consideration of

US$6.25mn in Nov 2010. In May 2014, the company granted an exclusive license to

Selecta Biosciences to develop, commercialise and sell pegsiticase worldwide,

excluding China, Hong Kong, Macau, Taiwan, and Japan. According to IMS, the PRC

uricase drug market reached over RMB144mn in 2013.

of 27

Valuation

Initiate at Buy with Target Price of HK$9.50

We derive the Target Price of HK$9.50, based on a 10-year discounted cash flow (DCF)

analysis. We assume a WACC of 9.5% and a terminal growth rate of 4%, given the

growth potential of biopharmaceuticals in China. Our target price implies 1.1x PEG

(using 2-year forward EPS CAGR), in-line with peers’ average. Given the company’s

leadership position in PRC biopharmaceutical industry and its attractive proprietary

pipeline, we believe the stock is attractive.

Exhibit 28: DCF analysis of 3SBio


RMB mn 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EBIT 402 842 1,076 1,259 1,427 1,613 1,806 2,005 2,205 2,404 2,596

NOPAT 360 716 915 1,070 1,213 1,371 1,535 1,704 1,874 2,043 2,207

Capex (44) (250) (270) (290) (309) (349) (391) (434) (478) (521) (562)

Working Capital (59) (260) (53) (223) (238) (269) (301) (334) (368) (401) (433)

D&A 77 211 217 225 314 355 397 441 485 529 571

Free Cash Flow 334 417 808 782 980 1,107 1,240 1,377 1,514 1,651 1,783

WACC 9.5%

Terminal grow th 4.0%

PV (CF over next 10 years) 7,299

PV(Terminal value) 14,894

Enterprise Value 22,192

+ Net Cash (debt) (1,628)

- Minority interests 250

+ Others 0

Equity Value (RMB mn) 20,315

Total share outstandings 2,515

Equity value per share (HK$) 9.50

Sensitivity analysis:

9.5 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%

8.0% 10.5 11.4 12.4 13.6 15.2 17.4 20.4

8.5% 9.5 10.2 11.0 11.9 13.1 14.7 16.8

9.0% 8.7 9.2 9.8 10.6 11.5 12.7 14.2

9.5% 7.9 8.4 8.9 9.5 10.2 11.1 12.3

10.0% 7.3 7.7 8.1 8.6 9.2 9.9 10.8

10.5% 6.7 7.1 7.4 7.8 8.3 8.9 9.6

11.0% 6.3 6.5 6.8 7.2 7.6 8.0 8.6

Terminal growth

WA

CC

of 27

Exhibit 29: Peer comparison

Exhibit 6:

Source: Bloomberg, CIRL

Financials

Revenue

We forecast 3SBio’s revenue will up 69% YoY to RMB2,821mn in FY16E, driven by 1)

strong growth of TPIAO, 2) sales of Yisaipu, which was consolidated since 2Q16, 3)

full-year sales contribution from Zhejiang Wansheng. We estimate revenue growth in

FY17/18E at 27%/15%, driven by TPIAO, EPIAO/SEPO and Yisaipu.

Exhibit 30: Revenue model of 3SBio (FY14-18E)

* Sales of Yisaipu was consolidated into the company since Apr 2016

^ Sales of Zhejiang Wansheng was consolidated into the company since Aug 2015


Company Ticker Price Mkt Cap FY15-17E PEG

HK$ HK$mn 2015 2016E 2017E 2015 2016E 2017E CAGR 2015 2016E 2017E

3SBio 1302 HK 8.09 20,349 29.5 27.1 19.4 80% 21% 40% 30% 0.9 16% 11% 13%

Lee's Pharm 950 HK 7.29 4,300 24.4 18.4 17.0 19% 1% 12% 6% 2.9 19% 15% 15%

FDJZ 1349 HK 7.55 6,969 50.4 39.2 28.8 8% 23% 46% 34% 1.2 18% 20% 24%

Luye 2186 HK 4.95 16,439 29.8 16.1 14.2 25% 16% 14% 15% 1.1 14% 14% 14%

Livzon 1513 HK 44.10 21,239 35.5 20.4 17.1 21% 20% 23% 21% 1.0 15% 15% 15%

CMS 867 HK 13.48 33,528 23.7 21.8 18.0 -5% 32% 22% 27% 0.8 21% 22% 23%

Sino Biopharm 1177 HK 4.97 36,839 20.8 18.2 15.9 18% 19% 11% 15% 1.2 25% 24% 22%

CSPC 1093 HK 7.45 45,086 28.1 21.5 17.6 31% 24% 22% 23% 0.9 20% 22% 23%

Fosun Pharma 2196 HK 23.30 60,523 22.0 17.1 14.8 16% 12% 12% 12% 1.4 14% 14% 14%

Average 29.3 21.6 17.9 17% 18% 20% 19% 1.3 18% 18% 19%

Average ex Lee's Pharm 30.0 22.0 18.1 16% 21% 21% 21% 1.1 18% 19% 19%

P/E (x) Earnings growth ROE (%)

RMB mn 2014 2015 2016E 2017E 2018E

TPIAO 445 605 817 1,067 1,337

Yisaipu* - - 740 1,140 1,311

EPIAO + SEPO 594 727 750 825 909

IV Iron Sucrose 65 82 90 99 109

Zhejiang Wansheng^ NA 103 250 263 276

Others 27 156 174 188 195

Revenue (RMB mn) 1,131 1,673 2,821 3,581 4,136

% YoY

TPIAO - 36% 35% 31% 25%

Yisaipu - - - 54% 15%

EPIAO + SEPO - 22% 3% 10% 10%

IV Iron Sucrose - 26% 10% 10% 10%

Zhejiang Wansheng - - 142% 5% 5%

Others - 469% 11% 8% 4%

Revenue Growth Rate (% YoY) - 48% 69% 27% 16%

%

TPIAO 39% 36% 29% 30% 32%

Yisaipu - - 26% 32% 32%

EPIAO + SEPO 53% 43% 27% 23% 22%

IV Iron Sucrose 6% 5% 3% 3% 3%

Zhejiang Wansheng - 6% 9% 7% 7%

Others 2% 9% 6% 5% 5%

Revenue mix (%) 100% 100% 100% 100% 100%

of 27

Margin analysis, SG&A ratio, R&D ratio

3SBio’s gross profit margin was decreased from 92.3% in FY14 to 85.5% in FY15, due

to the lower margin from Sirton, Sciprogen, and Zhejiang Wansheng. Excluding the

effect of consolidation of subsidiaries, gross profit margin was stable at 92.0% in FY15.

Guojian’s gross profit margin was 93.0%/93.6% in FY14/15. We model FY16/17/18E

GPM at 85.3%/86.3%/86.6%, based on change in product mix.

Selling expense ratio was decreased from 38.2% in FY14 to 35.0% in FY15, due to

improved sales productivity and the consolidation of Sciprogen and Sirton (both of

which had a lower distribution ratio). Administrative expense ratio increased from

15.1% in FY14 to 18.0% in FY15, due to listing expenses, advisory fees and warrant

expenses to Guojian’s management. Excluding the impact of listing expense, advisory

fees and warrant expenses, administrative expense ratio was 6.5% and 7.5% in FY14

and FY15 respectively. We model a stable SG&A ratio of 46%-47% over FY16-18E,

mainly reflecting lower administrative costs in the coming years.

R&D expense ratio was down 1.9ppt YoY to 6.7% in FY15. According to Guojian, its

R&D ratio was up 4.3ppt YoY to 20.3% in FY15. We model R&D ratio at

8.8%/9.3%/9.3% in FY16/17/18E.

Exhibit 31: Margin analysis (FY14-18E) Exhibit 32: SG&A ratio and R&D ratio (FY14-18E)

Exhibit 7:

Source: Company, CIRL estimates Source: Company, CIRL estimates

Capex

Capex will be used for maintenance of existing facilities and expansion of its

production capabilities. We model capex of RMB250mn/270mn/RMB290mn (vs.

guidance of RMB200-250mn) in FY16/17/18E, representing capex to sales ratio of

8.9%/7.5%/7.0%.

38.2%35.0%

36.1% 36.3% 36.3%

15.1%18.0%

10.5% 10.6% 10.6%

8.5% 6.7%8.8% 9.3% 9.3%

0%

10%

20%

30%

40%

50%

2014 2015 2016E 2017E 2018E

Selling and distribution expenses

Administrative expenses

R&D ratio

92.3%85.5% 85.3% 86.3% 86.6%

30.3%

24.0%

29.9% 30.1% 30.4%

25.8%

31.5%

22.7%24.6% 26.1%

0%

20%

40%

60%

80%

100%

2014 2015 2016E 2017E 2018E

Gross profit margin Operating profit margin

Net margin

of 27

Bank Borrowings

The company had an aggregate interest-bearing bank borrowings of RMB3,545mn as

of Jun 2016 vs. RMB405mn as of Dec 2015. The increase in bank borrowings was

due to additional bank loans of RMB3,998mn taken in 2016 for the acquisition of

Guojian. According to the company, it expects to repay RMB1bn annually. As a result,

we model a decreasing trend for financing costs at RMB160mn/RMB110mn/

RMB60mn in FY16/17/18E.

Net profit

Net profit was up 80% YoY to RMB526mn in FY15. Excluding i) share-based

expenses, ii) warrant expenses to Guojian’s management, iii) listing expenses, iv)

expenses for acquisition of Guojian, v) fair value gain in Guojian, normalised net profit

was up 46% YoY to RMB411mn.

We forecast net profit to grow from RMB526mn in FY15 to RMB1,079mn in FY18E,

representing a CAGR of 27%.

Exhibit 33: Net profit growth, 2014-18E


80%

21%

38%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1,000

1,200

2014 2015 2016E 2017E 2018E

Net profit (RMB mn) % YoY

of 27

Company Background

Exhibit 34: Product portfolio of 3SBio


Exhibit 35: Management Profile

Source: Company

Product Generic Name Indication Insurance Coverage Highlights

TPIAORecombinant human

thrombopoietin (rhTPO)

• CIT

• ITP

• NRDL Cat. B (w ork-

related injuries), 7 PRDLs

• 1 PRDL

The only approved rhTPO product in China

EPIAO

Injectable recombinant

human erythropoietin

(rhEPO)

• CKD-associated anemia

• Chemo-induced anemia

• Reduction of allogeneic blood

• NRDL Cat. B

• 3 PRDLs

• 8 PRDLs

The only rhEPO product approved for three

indications in China

YisaipurhTNF-α-receptor II - IgG

Fc fusion protein

• Rheumatoid arthritis

• Plague psoriasis

• Ankylosing spondylitis

7 PRDLs First-to-market drug

IV Iron

SucroseIron Sucrose Iron deficiency anemia NRDL Cat. B Complementary to EPIAO

SEPO

Injectable recombinant

human erythropoietin

(rhEPO)

• CKD-associated anemia

• Chemo-induced anemia

• NRDL Cat. B

• 8 PRDL

Complementary to EPIAO in dosage form,

coverage area, distribution channel

Sparin

Injectable low -molecular

w eight Heparin Calcium

(LMWH-Ca)

• Prevention of clotting during

dialysis

• Deep vein thrombosis

NRDL Cat. B and

National EDLComplementary to EPIAO and SEPO

IntefenRecombinant human

interferon alpha-2a

• Malignancies of lymphatic system,

viral infectious diseases, chronic

Hep. C, genital w arts

NRDL Cat. BOne of the f irst interferon alpha-2a products

marketed in China

Inlesin

Recombinant human

interleukin 2

(IL-2)

• Renal cell carcinoma, melanoma,

thoracic f luid bluid up caused by

cancer and TB

NRDL Cat. BOne of the f irst interleukin products introduced

in China

Name Position Experience and Responsibility

Mr. Lou Jing

Chairman,

CEO,

Executive

Director

• Mr. Lou w as the leading scientist in the development of EPIAO and TPIAO.

• Mr. Lou w as selected as a member of the national program “the Recruitment Program of Global Experts”,

aka “Thousand Talents Program”, in 2013.

• Mr. Lou obtained a Medical Doctor degree in clinical medicine from Shanghai Second Military Medical

University in 1985. He conducted post-doctoral research at National Institutes of Health of the U.S. after

obtaining a Ph.D. degree in molecular and cell biology from Fordham University in the U.S. in 1994. He also

obtained an Executive MBA from China Europe International Business School in 2008.

Mr. Tan Bo

CFO,

Executive

Director

• Mr. Tan joined Shenyang Sunshine as the CFO and vice president in 2009.

• He served as a vice president in the equity research division of Lehman Brothers Asia Limited from March

2006 to March 2007. He w orked as a senior analyst at Macquarie Securities Asia in Hong Kong from

October 2004 to February 2006.

• Mr. Tan obtained a Bachelor’s degree in Economics from Renmin University of China (中國人民大學) in

July 1994, a Master’s degree in Economics from the University of Connecticut in December 1996 and a

Master of International Management from Thunderbird School of Global Management in August 1998.

Ms. Su Dongmei

Senior VP,

Executive

Director

• Ms. Su is responsible for strategic direction and leadership of R&D of the Group.

• Ms. Su joined Shenyang Sunshine as a scientist of the R&D department in January 1993, and served as a

director of the R&D department from 1997 to 2006.

• Ms. Su obtained a Bachelor’s degree in Biochemistry from Jilin University (吉林大學) in July 1992 and a

Master’s and a Doctorate degree in Microbiology and Pharmacology from Shenyang Pharmaceutical

University (瀋陽藥科大學) in June 2001 and July 2010, respectively. She has published in a number of

academic journals on microbiology and medicinal biotechnology.

Mr. Huang Bin

VP,

Executive

Director

• Mr. Huang is in charge of the administrative management of the Group and the operations management of

the Group’s subsidiaries and joint ventures.

• Mr. Huang joined Shenyang Sunshine in 1993 as a manager of the human resources department.

• Mr. Huang received a diploma in Engineering from Northeast University (東北大學) in July 1987. He

attended a one-year training program in business management in Tsinghua University (清華大學) from April

2000 to April 2001.

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Risk Factors

Pricing risks

In China, pharmaceutical products are required to participate in a

government-sponsored competitive bidding process every year or every few years.

Recently, some new methods are used in the provincial tendering process, which

created downward pressures on the prices of pharmaceutical products. For example,

in 1H16, the company’s EPIAO faced pressure in certain provincial tendering process

and registered a drop in sales by 5.6% YoY.

Integration risks

There are integration risks that the company may not be able to integrate acquired

subsidiaries (such as Sciprogen and Sirton in Dec 2014 and Guojian in Mar 2016) to

achieve expect synergies and to fulfil the purposes of the acquisitions.

Competition risks

The company competes with other local and overseas pharmaceutical companies.

Their products can be used as substitute for the company’s products if they provide

similar indications.

Pipeline risks

The long-term competitiveness hinges on a company’s pipeline and its ability to

develop and commercialise new biotechnology and other pharmaceutical products.

There are risks of failure to meet safety, efficacy or other standards during the R&D

process, or the failure to obtain necessary regulatory approvals. Competition risks and

rapidly changing market demand would make commercialisation efforts more complex

and less certain.

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Exhibit 36: Financial Summary


Income statement Cash flow

Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E

Revenue 1,131 1,673 2,821 3,581 4,136 PBT 360 588 752 1,051 1,299

COGS (87) (242) (416) (491) (553) Taxes (133) (66) (113) (158) (195)

Gross profit 1,043 1,431 2,405 3,090 3,584 D&A 33 77 211 217 225

SG&A (602) (887) (1,314) (1,681) (1,941) CFO before WC change 494 580 1,099 1,353 1,559

R&D (96) (111) (248) (333) (383) Change in w orking capital 26 (59) (260) (53) (223)

Operating Profit 343 402 842 1,076 1,259 Cashflow from operation 387 455 726 1,142 1,141

Net f inance cost (5) 7 (135) (85) (35) CAPEX (20) (61) (250) (270) (290)

PBT 360 588 752 1,051 1,299 Free cash flow 367 394 476 872 851

Tax (68) (62) (113) (158) (195) Dividends (659) 0 0 0 0

Minority Interests 0 (0) 0 0 0 Balance Sheet adj. 652 (2,826) (3,548) (85) (35)

Net profit 292 526 639 894 1,104 Shares issued 0 4,133 0 0 0

Dividend (659) 0 0 0 0 Net cash flow 360 1,701 (3,073) 787 816

Net cash (debt) start (615) (255) 1,445 (1,628) (840)

Net cash (debt) at year-end (255) 1,445 (1,628) (840) (25)

Balance Sheet Ratios

Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E Year to Dec FY14A FY15A FY16E FY17E FY18E

Cash & cash equivalents 362 1,850 1,572 1,360 1,175 Growth rate (%)

Inventories 100 134 230 281 309 Revenue 29.2% 48.0% 68.6% 27.0% 15.5%

Trade receivables 348 550 996 1,064 1,315 Gross profit 31.7% 37.2% 68.0% 28.5% 16.0%

Other receivables 76 147 100 100 100 Operating profit 81.4% 17.2% 109.5% 27.8% 17.0%

Other current assets 56 82 150 150 150 Net profit 204.2% 80.4% 21.5% 39.8% 23.6%

PPE 374 450 1,790 1,932 2,086 Margins (%)

Other intangible assets 636 1,059 5,813 5,723 5,633 Gross profit margin 92.3% 85.5% 85.3% 86.3% 86.6%

Other non-current assets 354 2,359 336 336 336 Operating profit margin 30.3% 24.0% 29.9% 30.1% 30.4%

Total assets 2,306 6,630 10,988 10,946 11,106 Net profit margin 25.8% 31.5% 22.7% 25.0% 26.7%

Other ratios

Trade payables 26 34 79 95 101 ROE (%) 29.1% 16.1% 10.7% 13.2% 14.2%

Other payables 603 310 500 550 600 ROA (%) 16.3% 11.8% 7.3% 8.1% 10.0%

ST borrow ings 617 405 500 250 0 Net gearing (%) 27.1% -25.6% 24.8% 11.3% 0.3%

Other current liabilities 5 23 20 20 20 Interest coverage (x) 12 15 5 10 21

LT borrow ings 0 0 2,700 1,950 1,200 Receivables days 93 98 100 105 105

Other non-current liabilities 111 222 620 620 620 Payables days 68 45 50 65 65

Total Liabilities 1,363 995 4,419 3,485 2,541 Inventory days 315 177 160 190 195

Effective tax rate (%) 19.0% 10.5% 15.0% 15.0% 15.0%

Share capital 0 0 0 0 0

Reserves 932 5,624 6,318 7,211 8,314

Shareholders' equity 932 5,624 6,318 7,211 8,314

Minorities 11 11 250 250 250

Total equity 944 5,635 6,568 7,461 8,564

Net cash (debt) (255) 1,445 (1,628) (840) (25)

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Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]

Chloe Chan Research Analyst (852) 2235 7170 [email protected]

Johnny Yum Research Assistant (852) 2235 7617 [email protected]

Analyst Certification

I, Wilfred Yuen hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

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