Healthcare Sector

In this briefing:

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone
2. Healthcare Global: An Attractive Spread Trade

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone

Kangji Medical is a domestic leader in minimally invasive surgery devices. It has three main product types, trocars, polymer ligation clips, and forceps. The company started book building to raise up to USD 403m to list in Hong Kong.

In our previous note, we discussed that the company experienced strong growth in the past six years during which the company’s revenue tripled. We believe that its future growth will be driven by the growing minimally invasive surgery market and the replacement of international products by their domestic peers. Unlike other medical devices listings in Hong Kong, the company’s management team does not have impressive working experience prior to founding the company. We also note that the company has a strong cash flow plus a flexible setting for production capacities. Thus, it does not really have a strong need for capital raising to fund expansion. Kangji Medical’s sales were adversely affected by the COVID-19 but the sales rebounded sharply in April and we are not too concerned about the short term impact as non-urgent minimally invasive surgeries should come back after the pandemic. We forecast that the company would take up market share from peers in the next two years and value the company at USD 3.4 billion. 

In this note, we will provide our thoughts on the price range. We think while the valuation range provides a decent upside, the cornerstone stake is also smaller than previous hot deals therefore leaving some room for non-cornerstone investors.

2. Healthcare Global: An Attractive Spread Trade

Contrary to our expectations, CVC’s offer to acquire a substantial stake in Healthcare Global Enterprises (HCG IN) has been approved by the shareholders with a thumping majority. Nonetheless, as highlighted in our earlier note, even in this scenario, the opportunity is attractive with a gross spread of 7.8% (potential IRR of ~50%) as per the last closing price of INR 120.55. We continue to maintain that HCG remains an attractive opportunity for both event-driven and fundamental investors.

Insight Flow:

• What’s New
• What’s Next
• How Should One Trade?
• Conclusion

In this briefing:

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone
2. Healthcare Global: An Attractive Spread Trade
3. PharmaSGP IPO Initiation: Potent Medicine

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone

Kangji Medical is a domestic leader in minimally invasive surgery devices. It has three main product types, trocars, polymer ligation clips, and forceps. The company started book building to raise up to USD 403m to list in Hong Kong.

In our previous note, we discussed that the company experienced strong growth in the past six years during which the company’s revenue tripled. We believe that its future growth will be driven by the growing minimally invasive surgery market and the replacement of international products by their domestic peers. Unlike other medical devices listings in Hong Kong, the company’s management team does not have impressive working experience prior to founding the company. We also note that the company has a strong cash flow plus a flexible setting for production capacities. Thus, it does not really have a strong need for capital raising to fund expansion. Kangji Medical’s sales were adversely affected by the COVID-19 but the sales rebounded sharply in April and we are not too concerned about the short term impact as non-urgent minimally invasive surgeries should come back after the pandemic. We forecast that the company would take up market share from peers in the next two years and value the company at USD 3.4 billion. 

In this note, we will provide our thoughts on the price range. We think while the valuation range provides a decent upside, the cornerstone stake is also smaller than previous hot deals therefore leaving some room for non-cornerstone investors.

2. Healthcare Global: An Attractive Spread Trade

Contrary to our expectations, CVC’s offer to acquire a substantial stake in Healthcare Global Enterprises (HCG IN) has been approved by the shareholders with a thumping majority. Nonetheless, as highlighted in our earlier note, even in this scenario, the opportunity is attractive with a gross spread of 7.8% (potential IRR of ~50%) as per the last closing price of INR 120.55. We continue to maintain that HCG remains an attractive opportunity for both event-driven and fundamental investors.

Insight Flow:

• What’s New
• What’s Next
• How Should One Trade?
• Conclusion

3. PharmaSGP IPO Initiation: Potent Medicine

PharmaSGP (1780644D GR) is a pure-play consumer health company with a broad portfolio of leading chemical-free non-prescription pharmaceuticals sold over the counter (OTC) and other healthcare products. PharmaSGP has launched an IPO on the Frankfurt Stock Exchange at a price range of €31.50-36.50 per share. The offer, which a purely a secondary raise, will raise gross proceeds of €304.3-352.6 million for the selling shareholders. The book-building process is expected to end on 18 June, with trading expected to commence on 19 June.

In this briefing:

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone
2. Healthcare Global: An Attractive Spread Trade
3. PharmaSGP IPO Initiation: Potent Medicine
4. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

1. Kangji Medical (康基医疗) IPO: Hot Deal with Some Room for Non-Cornerstone

Kangji Medical is a domestic leader in minimally invasive surgery devices. It has three main product types, trocars, polymer ligation clips, and forceps. The company started book building to raise up to USD 403m to list in Hong Kong.

In our previous note, we discussed that the company experienced strong growth in the past six years during which the company’s revenue tripled. We believe that its future growth will be driven by the growing minimally invasive surgery market and the replacement of international products by their domestic peers. Unlike other medical devices listings in Hong Kong, the company’s management team does not have impressive working experience prior to founding the company. We also note that the company has a strong cash flow plus a flexible setting for production capacities. Thus, it does not really have a strong need for capital raising to fund expansion. Kangji Medical’s sales were adversely affected by the COVID-19 but the sales rebounded sharply in April and we are not too concerned about the short term impact as non-urgent minimally invasive surgeries should come back after the pandemic. We forecast that the company would take up market share from peers in the next two years and value the company at USD 3.4 billion. 

In this note, we will provide our thoughts on the price range. We think while the valuation range provides a decent upside, the cornerstone stake is also smaller than previous hot deals therefore leaving some room for non-cornerstone investors.

2. Healthcare Global: An Attractive Spread Trade

Contrary to our expectations, CVC’s offer to acquire a substantial stake in Healthcare Global Enterprises (HCG IN) has been approved by the shareholders with a thumping majority. Nonetheless, as highlighted in our earlier note, even in this scenario, the opportunity is attractive with a gross spread of 7.8% (potential IRR of ~50%) as per the last closing price of INR 120.55. We continue to maintain that HCG remains an attractive opportunity for both event-driven and fundamental investors.

Insight Flow:

• What’s New
• What’s Next
• How Should One Trade?
• Conclusion

3. PharmaSGP IPO Initiation: Potent Medicine

PharmaSGP (1780644D GR) is a pure-play consumer health company with a broad portfolio of leading chemical-free non-prescription pharmaceuticals sold over the counter (OTC) and other healthcare products. PharmaSGP has launched an IPO on the Frankfurt Stock Exchange at a price range of €31.50-36.50 per share. The offer, which a purely a secondary raise, will raise gross proceeds of €304.3-352.6 million for the selling shareholders. The book-building process is expected to end on 18 June, with trading expected to commence on 19 June.

4. Takeda Offloads Asia-Focused Drugs to South Korea’s Celltrion

• The Japanese drug maker, Takeda Pharmaceutical (4502 JP)  announced yesterday (11^th June 2020) that it has entered into an agreement to divest a portfolio of select non-core over-the-counter (OTC) and prescription drugs which are sold exclusively in Asia Pacific to South Korea’s Celltrion Inc (068270 KS)  for US$278m.
• Takeda will receive up to US$266m upfront in cash and up to an additional US$12m in potential milestone payments, subject to customary legal and regulatory closing conditions. The transaction is expected to conclude at the end of this year.
• The company has been divesting its non-core assets in order to reduce its debt and focus on its core areas. While the sale of non-core assets will result in a decline in the company’s top line in the short-term, we remain positive on the company’s mainstay products.
• On the other hand, we expect the deal to help Celltrion expand its presence in the diabetes and hypertension drug market (local-brand treatments) which should offer the company with sustainable revenue growth.

In this briefing:

1. Metlifecare/EQT: The Retirement Solution
2. Immunotech (永泰生物) IPO Trading: Bifurcation of Book Coverage
3. Ocumension Therapeutics IPO: Trading Debut
4. Ocumension (欧康维视) IPO Trading: Share Could Double Thanks to Record Demand
5. I-Mab (天境生物) Lock-Up Expiry: A Differentiated Immunotherapy Player Worth Reverse Inquiry

1. Metlifecare/EQT: The Retirement Solution

2. Immunotech (永泰生物) IPO Trading: Bifurcation of Book Coverage

3. Ocumension Therapeutics IPO: Trading Debut

4. Ocumension (欧康维视) IPO Trading: Share Could Double Thanks to Record Demand

5. I-Mab (天境生物) Lock-Up Expiry: A Differentiated Immunotherapy Player Worth Reverse Inquiry

I-Mab was listed in the US  on Jan 17th and returned 96% since listing. I-Mab has a highly differentiated two segments of products, including Fast-to-market China portfolio and Fast-to-PoC (proof of concept) global portfolio. As the shareholders lock-up is going to expiry, we are flagging potential block together with the recent development.

Our previous coverage on I-Mab:

• I-Mab (天境生物) Pre-IPO: Strong management and investor backing with differentiated products
• I-Mab (天境生物) IPO: Everest Deal a Valuation Booster
• I-Mab (天境生物) IPO Trading: Tiny Float and Undemanding Valuation

In this briefing:

1. Simcere (先声制药) Pre-IPO: Long History but Products Concentrated
2. Jinxin Fertility Placement: Sound Fundamentals
3. Hepalink Pharma IPO: Trading Debut
4. Shenzhen Hepalink (海普瑞) A+H Trading: 20% Upside Thanks to A-Share Performance
5. SK Biopharm – Clear Signs of Overshooting

1. Simcere (先声制药) Pre-IPO: Long History but Products Concentrated

Simcere Pharma has a long history dating back to 1995 and was previously listed in the US. The company is looking to raise USD 500m via a listing in Hong Kong. 

In this note, we look at the company’s key segments and existing drugs. We are of the view that the majority of the company’s existing products were generic drugs in the oncology, CNS and autoimmune segments. Three core products accounted for more than 50% of sales in 2019. We think the company’s earning growth in the past three years is commendable given the competition from other domestic generics. 

We look at the company’s innovative product pipeline. We are of the view that a majority of innovative products in the clinical stage of near commercialization is improvement over existing products and there is a lack of innovation. 

The company is mainly held by the founders’ family members with the remaining stakes owned by employee incentive scheme and domestic private equity investors.

2. Jinxin Fertility Placement: Sound Fundamentals

3 shareholders of Jinxin Fertility come to market to sell 207.6 million shares. In this note, we will provide our thoughts on the deal. We like the fundamentals of the company with recent acquisition help expanding the company’s footprint to Central China. We also note that past deal has done well.

3. Hepalink Pharma IPO: Trading Debut

4. Shenzhen Hepalink (海普瑞) A+H Trading: 20% Upside Thanks to A-Share Performance

5. SK Biopharm – Clear Signs of Overshooting

In this insight, we discuss the clear signs of overshooting at SK Biopharmaceuticals (326030 KS)’s share price, which has now catapulted as the 16th largest stock in Korea with a market cap of 18.3 trillion won (US$15.2 billion) (234,000 won per share) with less than $40 million in sales expected in 2020. SK Biopharm shares have surged 378% from the IPO price of 49,000 won. 

All in all, it is very difficult to make a convincing Buy argument for SK Biopharm at current levels and investors should take a more prudent approach to waiting until the stock price comes down to more reasonable levels. 

The following are the major reasons why we think SK Biopharm is overshooting and the risk/reward of going long on this stock no longer is attractive. 

• Foreign institutional investors are selling big
• The trading value could peak today
• Under-performance of SK Holdings last three weeks

Risk/Reward Favors Going Long on SK Holdings Again

In our base case, we have assumed that the recent surge in SK Biopharm is a case of overshooting so we used a much lower price (150,000 won) than the current price. However, even if we use a much lower value assumption for SK Biopharm, our base case NAV for SK Holdings comes out to be 365,639 won, which is 37% above the current price. Thus, there is a more convincing case of going long on SK Holdings again. 

In this briefing:

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure

Venus Medtech is a dominant player in the heart valve replacement (TAVR) market in China and was listed in Hong Kong on December 10th. Since listing, the stock returned 78.9%. As the lock-up restriction for controlling shareholders and the cornerstone investors had just expired, we are flagging potential block together with the recent development.

In this briefing:

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure
2. Kangji Medical (康基医疗) Pre-IPO: COVID-19 Impacts and Thoughts on Valuation

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure

Venus Medtech is a dominant player in the heart valve replacement (TAVR) market in China and was listed in Hong Kong on December 10th. Since listing, the stock returned 78.9%. As the lock-up restriction for controlling shareholders and the cornerstone investors had just expired, we are flagging potential block together with the recent development.

2. Kangji Medical (康基医疗) Pre-IPO: COVID-19 Impacts and Thoughts on Valuation

Kangji Medical is a domestic leader in minimally invasive surgery devices. It has three main product types, trocars, polymer ligation clips, and forceps. The company started pre-marketing for a USD 300m listing in Hong Kong.

In our previous note, we discussed that the company experienced strong growth in the past six years during which the company’s revenue tripled. We believe that its future growth will be driven by the growing minimally invasive surgery market (20-30% p.a.) and the replacement of international products by their domestic peers. The key risk is the central procurement that targets high-margin medical devices which will force companies to cut product prices in order to join the reimbursement scheme. Unlike other medical devices listings in Hong Kong, the company’s management team does not have impressive working experience prior to founding the company. We also note that the company has a strong cash flow plus a flexible setting for production capacities. Thus, it does not really have a strong need for capital raising to fund expansion. 

In this note, we look at the updates from PHIP. We note that Kangji Medical’s sales were adversely affected by the COVID-19 but the sales rebounded sharply in April. Although Kangji’s 1Q performance is behind other medical device companies, we are not too concerned about the short term impact as non-urgent minimally invasive surgeries should come back after the pandemic. We forecast that the company would take up market share from peers in the next two years and value the company at USD 3.4 billion.

In this briefing:

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure
2. Kangji Medical (康基医疗) Pre-IPO: COVID-19 Impacts and Thoughts on Valuation
3. SK Biopharmaceuticals IPO: Potential Overhang Issue by SK Holdings

1. Venus Medtech Lock-Up Expiry: Could Face Selling Pressure

Venus Medtech is a dominant player in the heart valve replacement (TAVR) market in China and was listed in Hong Kong on December 10th. Since listing, the stock returned 78.9%. As the lock-up restriction for controlling shareholders and the cornerstone investors had just expired, we are flagging potential block together with the recent development.

2. Kangji Medical (康基医疗) Pre-IPO: COVID-19 Impacts and Thoughts on Valuation

Kangji Medical is a domestic leader in minimally invasive surgery devices. It has three main product types, trocars, polymer ligation clips, and forceps. The company started pre-marketing for a USD 300m listing in Hong Kong.

In our previous note, we discussed that the company experienced strong growth in the past six years during which the company’s revenue tripled. We believe that its future growth will be driven by the growing minimally invasive surgery market (20-30% p.a.) and the replacement of international products by their domestic peers. The key risk is the central procurement that targets high-margin medical devices which will force companies to cut product prices in order to join the reimbursement scheme. Unlike other medical devices listings in Hong Kong, the company’s management team does not have impressive working experience prior to founding the company. We also note that the company has a strong cash flow plus a flexible setting for production capacities. Thus, it does not really have a strong need for capital raising to fund expansion. 

In this note, we look at the updates from PHIP. We note that Kangji Medical’s sales were adversely affected by the COVID-19 but the sales rebounded sharply in April. Although Kangji’s 1Q performance is behind other medical device companies, we are not too concerned about the short term impact as non-urgent minimally invasive surgeries should come back after the pandemic. We forecast that the company would take up market share from peers in the next two years and value the company at USD 3.4 billion.

3. SK Biopharmaceuticals IPO: Potential Overhang Issue by SK Holdings

First, let me tell you this. The mood seems super hot on the SK Biopharm IPO. The book-building (overseas) is now in progress.

And we are already hearing that it is in hot demand like already ten times the target waiting in line (reported by MoneyToday Bell).

So, the street confidently speculates that the offering price will comfortably sit at the ceiling (or higher), which gives a ₩3.84tril valuation.

Three things are driving the demand.

First, the entire biopharma sector in Korea is booming, as evidenced in the latest local IPO, SCM Life Science, which delivered a 1032 to 1 subscription.

Second, believe it or not, the street seems overly confident about the commercial success of the new drug, XCOPRI (Cenobamate), despite the much worse-than-expected latest sale numbers for Sunosi (Solriamfetol). Moreover, not many investors seem to be objecting to the company’s claim that it will get FDA approval for the remaining ones in the pipeline. Biopharm CEO said that every two years, the company would get FDA approval for each drug in development. Very aggressive, but surprisingly, widely accepted by many investors.

Third, relatively tight volume in circulation (even after the IPO) also seems to be fueling the demand. Much less than 20% (depending on the lock-up pledges in this IPO) will be trading after the IPO. Almost guaranteed entry to KOSPI 200 will make it even tighter.

In this briefing:

1. Hepalink Pharma Triangle Breakout

1. Hepalink Pharma Triangle Breakout

Shenzhen Hepalink Pharma Co., Ltd. (002399 CH) surge off of support does provide better evidence that the triangle pattern will break to the upside. Buy volume spiked and any follow through strength needs to see volumes improve for sustainability.

The standout chart pattern is the bullish triangle pattern with break points at 24 and 21. Triangles typically form due to two opposing cycles clashing and results in a higher energy breakout move. The key question is if a breakout has enough energy to clear the firm range barrier of 27? The 24 breakout point that turns into support will answer this question.

Rally peaks over the last year are well defined at 26/27 and the immediate rally objective and challenge. There is growing evidence that pent up energy will finally clear range resistance and is a matter of time.

In this briefing:

1. Hepalink Pharma Triangle Breakout
2. Kangji Medical IPO Initiation: The Cutting Edge

1. Hepalink Pharma Triangle Breakout

Shenzhen Hepalink Pharma Co., Ltd. (002399 CH) surge off of support does provide better evidence that the triangle pattern will break to the upside. Buy volume spiked and any follow through strength needs to see volumes improve for sustainability.

The standout chart pattern is the bullish triangle pattern with break points at 24 and 21. Triangles typically form due to two opposing cycles clashing and results in a higher energy breakout move. The key question is if a breakout has enough energy to clear the firm range barrier of 27? The 24 breakout point that turns into support will answer this question.

Rally peaks over the last year are well defined at 26/27 and the immediate rally objective and challenge. There is growing evidence that pent up energy will finally clear range resistance and is a matter of time.

2. Kangji Medical IPO Initiation: The Cutting Edge

Kangji Medical (1498779D CH) is the largest domestic minimally invasive surgical instruments and accessories (MISIA) platform in China, with a 2.7% share of China’s MISIA market in 2019, according to CIC. Kangji is backed by TPG Capital (24.35% shareholder) and LYFE Capital (7.48%).