Brokers' Take AsiaPharm Group, Oct 25 close: S$0.605 Oct 26, 2006
The Business Times DBS VICKERS SECURITIES, Oct 25
ASIAPHARM has acquired the patents, process technology, manufacturing licence and distribution networks for CMNa, a cancer treatment injection drug, for 80 million yuan (S$16 million). Once the drug is approved for use in radiotherapy by SFDA (China's State Food and Drug Administration), AsiaPharm will pay an additional 50 million yuan to Lifetech Pharmaceuticals in Guangzhou.
CMNa is the only chemical sensitiser for radiotherapy for cancer treatment in the world. The drug enjoys a 12-year protection that prevents the duplication, marketing and import of similar products in the PRC till 2014. The drug is patented in the US and EU and is awaiting patent approval from Japan, providing potential for exports.
Launched in 2003, CMNa achieved net profits of 8 million yuan in 2005, and is expected to achieve sales of 30 million yuan and net profits of 13 million yuan for 2006 (a year-on-year increase of 63 per cent). This translates into a net margin of 43 per cent against AsiaPharm's net margins of 26 per cent. We believe the drug has strong potential for growth and will ride on AsiaPharm's hospital distribution network, which covers 1,500 hospitals.
In China, there are 1.6 to 1.7 million new cancer cases every year with total patients at 4.5 million. The drug is currently sold to 300 hospitals and is under the Regional Health Insurance Scheme in 16 provinces. Growth should be exponential once it hits the National Health Insurance list and receives SFDA approval for chemotherapy.
The acquisition is pegged at an undemanding 6 times PE based on 80 million yuan, which will rise to 10 times on FY2006 earnings, including the additional 50 million yuan. We expect the acquisition to be EPS-accretive. Assuming 25 per cent growth in sales over the next two years, we expect the acquisition to contribute 14 per cent to group net profits next year.
However, the impact on NTA is dilutive as its NTA is only 3 million, as AsiaPharm is buying over the drug and its potential, and not the company nor the plant at Guangzhou. AsiaPharm plans to produce the drug at its own Yantai plant, which has excess capacity. On a proforma basis, its NTA per share will be diluted by 21 per cent to 0.72 yuan based on FY2005 NTA.
We have raised our net earnings forecast by 14 per cent and 18 per cent for FY2007 and FY2008 respectively and target price to S$0.76, based on 15 times PE on FY2007 earnings, taking into account the drug's growth potential. Upgrade to 'buy' from 'hold'.
BUY Compiled byConrad Tan | 
