Summary

Lansen Pharmaceutical Holdings Limited, (The Group), is a specialty pharmaceutical group principally engaged in the development, production and sale of specialty prescription western pharmaceuticals for the treatment of autoimmune diseases in the PRC.

In recent years, according to the BDCL Report, increasing usage of drugs to treat autoimmune rheumatic disease has been observed from the year 2006 to 2008, with a CAGR of 18.4%. This is resulted from a high growth rate of Hospitals with Rheumatology Departments, rheumatology specialists and patients under RA disease treatment

In our view, the future growth rate of rheumatology market would maintain a great CAGR because: 1. The ratio of Rheumatology specialists to patients in PRC is one tenth of that of U.S. according to FDA and PRC Ministry of Health. 2. RMB 850 billion government spending on healthcare through 2011.

The 2009 PE of the company is 23.5x, according to the mean of offering price. We set 2010PE and EPS of the company to be 21x and HK$: 0.2278. Our year-end target price is HK$ 5.01, implying 28.13% of upside potential relative to the mean of offering price ranged from HK$2.95 to HK$3.91. Rating: Subscribe

Company Description

Lansen Pharmaceutical Holdings Limited, (The Group), is a specialty pharmaceutical group principally engaged in the development, production and sale of specialty prescription western pharmaceuticals for the treatment of autoimmune diseases in the PRC.

The Group does not aim to invest revolutionary new products. Instead, the Group puts considerate effort on marketing research to find the doctors` and patients` needs and conduct targeted research through collaboration with academic scientists and clinical researchers to achieve a wide range of product series.

As of today, the Group has entered into agency distribution agreement for five rheumatic specialty prescription western pharmaceuticals with suppliers for a fixed term ranging from two to six years as shown:

The terms of renewal greatly hinges on the fulfillment of minimum purchase orders.

Rheumatology Market in PRC

Rheumatic disease, particularly Rheumatoid Arthritis (RA), is a group of chronic disease with uncommon epidemiology, affecting joints and connective tissues characterized by chronic pain and hard to be cured.

Based on the statistics of Ministry of Health conducted in 2008, RA ranks fourth in terms of prevalence rate among 10 major chronic diseases. According to the BDCL Report, people currently suffering from arthritis amounted to over 100 million in PRC, accounting for 29.2% of the total number in the world, which is largely exceed that of US (11.4%).

Treatment of Autoimmune Rheumatic Disease

According to the BDCL Report, there are various types of pharmaceuticals to treat autoimmune rheumatic diseases namely anti-inflammatory and analgesic drugs, hormones, DMARDs (a category of drugs focused on slowing the progression of rheumatic diseases as opposed to simply treating inflammation) and biological agents.

High Market Growth Rate in Future

In recent years, according to the BDCL Report, increasing usage of drugs to treat autoimmune rheumatic disease has been observed from the year 2006 to 2008, with a CAGR of 18.4% as shown.

This is resulted from a high growth rate of Hospitals with Rheumatology Departments, rheumatology specialists and patients under RA disease treatment as shown.

From the graph above, the sales of DMARDs, the type drugs the Group's product of core business belongs, ranked lower than other pharmaceuticals, but it is worth noting that the CAGR growth of therapeutic treatment by DMARDS has higher than that of the therapeutic treatment by anti-inflammatory and analgesic drugs in recent years as shown below.

In our view, the future growth rate of rheumatology market would maintain a great CAGR because:

- The ratio of Rheumatology specialists to patients in PRC is one tenth of that of U.S. according to FDA and PRC Ministry of Health.

- RMB 850 billion government spending on healthcare through 2011, which specially emphasizes on coverage expansion of medical insurance, improvement of pharmaceutical system and medical service system (especially in 2nd and 3rd tiers cities).

Core Business Overview

The core business of the Group currently comprised five rheumatic specialty prescription western pharmaceuticals, of which currently only Pafulin is manufactured and sold by the Group. The other five are not self-manufactured but are sold by the Group under agency distrbtuion arrangements.

The leading product exclusively manufactured and sold by the Group, Pafulin, launched in 2002, was ranked No.1 in terms of sales in DMARDs market in 2008 with 15.9% market share. Tuoshu, the second leading product, launched in 2006 under an agency distribution arrangement, was ranked No.4 in terms of sales in the DMARDs market with 6.9% market share in the PRC in 2008. According to BDCL report, the sales of Pafulin and Tuoshu together represent 4.7% of the sales of drugs to treat autoimmune rheumatic disease in PRC hospital in 2008, we expected that the sales of these products would keep considerate growth rate in future because of their proven synergistic pharmaceutical effects.

Financial Analysis

The following graph showing the trend of revenue, and revenue distribution starting from 2007 to 2009.

The diagram below demonstrates the gross profit and gross margin of core business and other pharmaceuticals starting from 2007 to 2009.

Since the majority of revenue is from core business, which has much higher gross profit margin relative to that of other pharmaceuticals, this explains the stable high gross profit margin over the track record period.

It is not surprising that the gross profit margin and hence the net profit margin of the Group would have further rooms of improvement in the future because of the economic of scales and effective cost control measures.

Competitive Strength

- Though the leading products of the Group are not protected by patent. The Group is benefited from the competitive acquisition cost of raw material leading technique of active intergradient extraction from it.

- Absence of other products offered in the PRC market with the same chemical formula.

- Dedicated platform to leverage on extensive sales and distribution network.

Risk

- Effect of China healthcare reform on pharmaceutical industry.

- Depends on agency distribution arrangements for some products

- Pafulin and Tuoshu contribute substantial portions of sales revenue.

Valuation

Compared to peers as shown below, the industrial average of 2009PE is 25.05x (Sinopharm is excluded) that is closes to the company's 2009PE: 23.5x, according to the mean of offering price. We set 2010PE and EPS of the company to be 21x and HK$: 0.2278. Our year-end target price is HK$ 5.01, implying 28.13% of upside potential relative to the upper end of offering price ranged from HK$2.95 to HK$3.91. Rating: Subscribe.

Peer Comparison

Financial Information

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