Daily Consumer: Amarin–2019’s Biggest Buyout Target for Big Pharma and more

In this briefing:

1. Amarin–2019’s Biggest Buyout Target for Big Pharma
2. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi
3. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge
4. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines
5. EGM Diaries

1. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

2. The GER Weekly EVENTS Wrap: Healius, FamilyMart, Healthscope, Myob and Hitachi

Happy New Year! Below is a recap of the key event-driven research produced by the Global Equity Research team. This week we dig into the potential low-ball bid for Healius (HLS AU) , we update our view on the messy deal between Familymart Uny Holdings (8028 JP) and Don Quijote Holdings (7532 JP) as the deal shifts to earnings dislocation. In addition, we question the economics of a material bump for Healthscope Ltd (HSO AU), assess the reduced bid (and great call by Arun) on MYOB Group Ltd (MYO AU) and finally dig into the potentially risky acquisition by Hitachi Ltd (6501 JP) of ABB Ltd (ABBN VX)‘s power grids. 

The rest of our event-driven research can be found below

Best of luck for the new week – Rickin, Venkat and Arun

3. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK). 

4. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines

Last Week in Event SPACE …

• On a Risk/Reward basis, the arb is not very attractive at M1 Ltd (M1 SP)‘s current price. 
• Pricing aside, Jangho Group Co Ltd A (601886 CH)‘s potential tilt for Healius (HLS AU) may get dinged by the regulator.
• DNO ASA (DNO NO) edges closer to completing its hostile offer for Faroe Petroleum (FPM LN).
• Unwind the Jardine Cycle & Carriage (JCNC SP) setup for those who entered at the recent low.
• Jardine Matheson Hldgs (JM SP)‘s outperformance of Jardine Strategic Hldgs (JS SP) is unjustified.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

• Pricing looks off according to Arun George, at a 15% discount to peers on a CY2019 EV/EBITDA metric.
• Still, Healius is not without issues, having to pay a backpay bill to staff last year, bump salaries for workers at its Victorian pathology division, while also losing a lucrative national bowel screening contract in 2017.  

• Notwithstanding the price, as Healius is an owner of sensitive medical data, the FIRB would take a very close look at this transaction, especially one where the acquirer is a Chinese entity, given the recent rejection of the CKI/APA Group (APA AU) deal and Huawei’s 5G. 

(link to Arun George ‘s insight: Healius (HLS AU): An Unattractive Bid)

Thanachart Capital (TCAP TB) (Mkt Cap: $1.8bn; Liquidity: $4.5mn)

As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, Athaporn Arayasantiparb, CFA tackles the obvious questions – what price and what benefits? 

• Based on his estimates, the potential improvements in ROE from the merger and potential divestment of Thanachart’s 19% stake in MBK, he thinks it justifies a Bt11.1/sh premium or Bt64.25/sh. Anything above that would feasibly be value destroying.
• In terms of benefits, Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up the deposit base for both banks. 

(link to Athaporn’s insight: Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?)  

Nexon Co Ltd (3659 JP) (Mkt Cap: $11.4bn; Liquidity: $33mn)

Reportedly Nexon’s founder Kim Jung-Joo and other related parties plan to sell their 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon.  Nexon has a market cap of $11.6bn but the rumoured price tag for the 47.98% take is $8.9bn implying a significant management premium.

• Given the size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not expected to bid. Douglas Kim believes the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). 

(link to Douglas’ insight: Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?)  

Faroe Petroleum (FPM LN) (Mkt Cap: $721mn; Liquidity: $5.5mn)

Initially launched as a voluntary conditional Offer late November,  DNO ASA (DNO NO) crept over 30% in Faroe this week and is now required to launch an MGO. The Offer price remains the same at GBP 1.52/share, however, the acceptance condition falls to 50% from 57.5% previously.

• Faroe’s pushback on the Offer – that the 21% premium offered to pre-announcement price is only “about half the average premium paid on all UK takeovers over the last 10 years” – is disingenuous.  DNO built a 27.68% stake in a matter of days back in April 2018, clearly telescoping that a full-blown Offer was a possibility (although denying it at the time). The unaffected price prior to the acquisition of that stake should be used as a reference point for the current Offer. This translates to a 44.8% premium.
• DNO has 43.1% in the bag, close to the 50% needed. There are investors (like Cavendish, holding 1.38%) who side with Faroe saying that the Offer is too low. With shares trading through terms, my bet is that DNO may need to kiss this offer, say 5-10%, to get it over the line. 

(link to my insight: DNO Closes In On Faroe)  

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

Curtis Lehnert recommends closing out the set-up trade, now that he sees the stub having reverted to its long-term average level. Since his recommendation, the trade has made a notional gain of 5% in a two and a half month time span.  As an aside I back out a discount to NAV of 21%, off its recent low of ~28% in early Nov, and compares to a 12-month average of 19%.

(link to Curtis’ insight: Jardine C&C (JCNC SP): Close the Stub Trade)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

Back in September, I discussed in StubWorld: Matheson Unloads JLT, Unwind Takara that Matheson may use the net proceeds of £1.7bn (US$2.2bn) from selling its 40.16% stake in Jardine Lloyd Thompson Group P (JLT LN) into Marsh & Mclennan Cos (MMC US)‘s Offer, towards increasing its stake in JS, as there was/is still some room before the maximum 85% ownership level was reached. This is what happened (or at least a token amount of the proceeds), with Matheson buying ~2.5mn shares in Strategic for ~US90mn in early October. Matheson now holds a little less than 84% by my calculation – the group unhelpfully states it holds 84% without going into decimal places.  

• After touching a 17-year low ratio level of 1.41x (JM/JS) last September, that has blown out to 1.83x, having closed the year at 1.89x, a two-and-a-half year high, and compares to the long-term average of 1.7x.
• Strategic continues to trade “cheap” at ~44% discount to NAV, adjusted for the cross-holding. The spread between Matheson and Strategic is around its widest inside a year. Furthermore, as Matheson increased its stake, Strategic also acquired shares in Matheson earlier last year. Both elevate the cross-holding, which in principle you would expect the two companies to become even more closely aligned.

• I’d recommend buying into Strategic for its attractive NAV discount and further share acquisitions from Matheson.

Stub Wrap

Using a basket of 40 Holdcos I constructed, the average NAV discount in 2018 steadily widened throughout the year. Elsewhere:

• Passive, tech-related and illiquid Holdcos widened most; while cross-border and property Holdcos were the best of the worst.  
• Illiquid, property, and passive Holdcos’ underperformance (or widening) was more pronounced in the first half. Tech Holdcos primarily widened in the second half.
• Worst performers (discount widening): In absolute % terms, United Co Rusal Plc (486 HK) and Asm International Nv (ASM NA) roughly shared the largest moves; while Dah Sing Financial (440 HK), First Pacific Co (142 HK), Genting Bhd (GENT MK) and Pasona Group (2168 JP) are trading at or near their 52-week wides and 52-week low prices.
• Best performers (discount narrowing): China Conch Venture Holdings Ltd (586 HK) is the only Holdco in positive territory; while Japan Post Holdings (6178 JP) is trading closest to its narrowest level in the last 12 months.

(link to my insight: StubWorld: A 2018 Review In Charts)  

Briefly …

Nong Shim Holdings Co (072710 KS)‘s 32.72% stake in Nongshim Co Ltd (004370 KS) accounts for ~70% of its NAV. Sanghyun Park backs out a current discount to NAV of 54%, a 2-year low. Using his numbers, I see the Holdco at 2STD to the 12-month average. The problem is the parent’s liquidity or lack of it.
(link to Sanghyun’s insight: Nongshim Holdings Stub Trade: Time for Holdco To Catch Up) 

Ke Yan, CFA, FRM looked at the southbound flow for the month of December. Shandong Gold Mining Co Ltd (1787 HK) topped the list of Southbound inflow amongst the big cap names, followed by Shanghai Fosun Pharmaceutical (Group) (2196 HK) and Guangzhou Baiyunshan Phrmcl Hldgs (874 HK). In the mid-cap space, Yichang Hec Changjiang Pharm (1558 HK) saw a big increase of holdings by mainland investors, followed by  Greentown Service Group (2869 HK), Fullshare Holdings (607 HK) and Beijing Tong Ren Tang Chinese Medicine (3613 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December)  

• Takeda Pharmaceutical (4502 JP)  announced that the Royal Court of Jersey had sanctioned the Shire Scheme.

• The Barrick Gold (ABX US) / Randgold Resources (RRS LN) Scheme is now effective.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

• Source: HKEx

5. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge.