Chugai Pharmaceutical: Steady Outlook But Pipeline Visibility ...

Chugai Pharmaceutical experienced unexpected demand for the drug Actemra during the pandemic, but sales appear to have peaked in FY12/2020. KarretaAdvisors1.15KFollowersFollowSummaryChugaiPharmaceuticalexperiencedunexpecteddemandforthedrugActemraduringthepandemic,butsalesappeartohavepeakedinFY12/2020.NewreleasessuchasHemlibrashouldbegintoscaleinFY12/2021,togetherwithdistributionsalesofRoche'sTecentriq.Thecompanyhasastableoutlookforthemediumterm,butwithlimitedvisibilityoverthedevelopmentpipeline,weareneutralontheshares.InvestmentthesisChugaiPharmaceutical(OTCPK:CHGCF)experiencedpositivetailwindsforActemrasaleswiththepandemic.AlthoughdemandhaspeakedforActemra,productreleasessuchasHemlibrashouldmaintainsteadyearningsmomentumintoFY12/2021.Withlimitedvisibilityoverthedevelopmentpipelineweareneutralontheshares.QuickprimerChugaiisaJapanesedrugmakeraffiliatedwithRoche(OTCQX:RHHBY)whichownsa60%stake.Foundedin1925,thecompany'smajordrugsarerheumatoidarthritistreatmentActemra,lungcancerdrugAlecensaandhemophiliaAagentHemlibra.ChugaimarketsRochedrugsinJapan,andusesRoche'sdistributionforin-housedrugsalesoverseas.OurobjectivesInthispiece,weinvestigatethefollowing:Assesstheoutlookforthekeyin-housedrugsActemraandHemlibra.Lookattheproprietarynewdrugdevelopmentpipeline.Wewilltakeeachoneinturn.KeydrugsoutlookActemrasalesblewpastcompanyestimatesby48%inFY12/2020,drivenbyexportdemandasitwasusedoff-labeltopreventprogressionofdiseaseinCOVID-19patients.ThiswasapositivegiventhepandemicaffectingthelaunchofnewproductssuchasTecentriqandHemlibra.ThecompanyisguidingActemrasalestodropby36%YoYasthepandemicimpactdissipates.Roche'soncologydrugAvastinwillcontinuetodropYoYwithpricereductionsandgenericseatingintomarketshare.KeydrugsalesinFY12/2020Source:Company,createdbyauthorManagementisexpectingthefollowingoutlookforthekeydrugsinFY12/2021.FollowingthemajorsuccessofHemlibraexportsinFY12/2020,thisdrugcomestopofthelistintermsofgrowthYoYandcontributiontosales.KeydrugsaleguidanceforFY12/2021Source:Company,createdbyauthorMarketpenetrationforHemlibrawasdelayedduringFY12/2020butitssolidefficacyandmoreconvenientdosingiswinningpatients.Weestimateitwillhavearound80%ofthewithinhibitormarket,andaround50%ofthenon-inhibitormarketinFY12/2021.TecentriqisRoche'soncologydrug,andthisisexpectedtoseedomesticsalescontinueitsgrowthtrajectoryYoY.PotentialupsidesurprisesinFY12/2021couldcomefromaPhase3REMDACTAstudywhichisevaluatingthecombinationofActemrawithGileadSciences'(GILD)VekluryforsevereCOVID-19patienttreatment.ThiscouldhelpcushiontheexpecteddeclineinActemrasalesYoYbutmaynotbeamajordriver.Allinall,webelievetheoutlookforFY12/2021lookspositivegivenHemlibra'sgrowthYoY.Overall,ChugailookstobeabletogrowtotalrevenuesYoY,aheadofcompanyguidance.FY12/21companyguidanceandconsensusforecastsSource:Company,Refinitiv,createdbyauthorPipelinetocomeThebearcaseforChugaicomesfromthenewdrugpipelinewhichdoesnotappeartomakeanymajorrisk-adjustedrevenuecontributionuntilFY12/2025.Forin-housedrugsthecompanyhasfiledEnspryngforNMOSD(NeuromyelitisOpticaSpectrumDisorder)whichhasbeenapprovedin14countries,butisnotexpectedtodeliverlargevolumes.Roche'sdrugRisdiplamforspinalmuscularatrophyhasalsobeenfiled,butearningspotentialhasitslimitsasadistributorinJapan.InthelongertermChugai'sspecialisminoncologyisfocusedontwoproprietaryanticancerdevelopments(AMY109andSTA551),bothcurrentlyinPhase1.Anyadvancementherewillfavorabletrialresultswillhelpsupporthighvaluationmultiples.Thecompanyalsoplanstocommenceclinicaldevelopmentofmid-sizemoleculedrugstechnologies(anewplatformfordrugdiscovery,aftersmallmoleculeandantibodies)in2021.TherelationshipwithRochemeansthattherewillalwaysbenewproductsthatwouldbemadeavailableforsaleinthedomesticmarket.Chugaihastwodrugpipelinestorelyon,andintheshorttomediumtermTencentriqisexpectedtobeamaterialcontributor.Fromtheevidenceabove,webelievethattherearenomajornewdrugreleasesthatwillcontributesignificantlytoearningsinthenext2-3years.However,thedelayedmarketpenetrationofHemlibraandTecentriqfromFY12/2020willactastailwindsforthenext2years.ValuationThesharesaretradingonconsensusforecastsPERFY12/202129.9x,andafreecashflowyield3.1%.Pandemic-relateddemandwillturndown,butwithHelimbraandTecentriqscalingwefeelearningsvisibilityisrelativelyfirm.RisksAlthoughundisclosed,themarketcurrentlysuspectsActemrawillseegenericcompetitionfromFY12/2025.Ifthiscomesmuchsoonerthanexpected,therecouldberisksoverearningscontributionfromthisdrug.Upsideriskcomesfromacceleratedsuccessinnewdrugdiscoveriesfromthecurrentpipeline,resultinginearlierthanexpectedearningcontribution.ConclusionChugaihasbenefitedfromoff-labeluseofActemraduringthepandemic,andalthoughhardtoquantifythedemandforthisproducthasessentiallypeaked.NewreleaseHemlibrashouldkeepoverallearningsonanevenkeelforthenexttwoyears,andthecompanywillmaintaindecentfreecashflowgeneration.However,untilweseemoreevidenceofadvancesinnewdrugdevelopmentweratethesharesasneutral.ThisarticlewaswrittenbyKarretaAdvisors1.15KFollowersFollowWeareanindependentresearchhouse.Welookatglobalstocks,favoringthosewithsustainablegrowthandrecognizedoremergingasahighqualityfranchiseatsuitablevaluations.Disclosure:I/wehavenopositionsinanystocksmentioned,andnoplanstoinitiateanypositionswithinthenext72hours.Iwrotethisarticlemyself,anditexpressesmyownopinions.Iamnotreceivingcompensationforit(otherthanfromSeekingAlpha).Ihavenobusinessrelationshipwithanycompanywhosestockismentionedinthisarticle.RecommendedForYouComments(2)NewestToensurethisdoesn’thappeninthefuture,pleaseenableJavascriptandcookiesinyourbrowser.Isthishappeningtoyoufrequently?Pleasereportitonourfeedbackforum.Ifyouhaveanad-blockerenabledyoumaybeblockedfromproceeding.Pleasedisableyourad-blockerandrefresh.