To Advance into Immune-Cell Therapy Market

Fosun Pharma intends to make an investment equivalent to no more than USD80 million in establishing a joint venture, Kite Biotechnology, with KITE, each of which owns a 50% share, with a view to developing the cancer T cell immunotherapy market in Mainland China, Hong Kong and Macau. Kite Biotechnology will acquire KITE's commercial rights for KTE-C19 in China, as well as the pre-option to license future products (namely KITE-439 and KITE-718).

Tumor immunotherapy is the biggest breakthrough in cancer therapy in recent years, and Car-T is the most advanced technology in tumor immunotherapy. Currently, KITE, Novartis and Juno take the lead in international R&D, and KITE's KET-C19 is expected to be approved in 1H2017, making the world's first Car-T therapy product. Fosun Pharma, via domestic cooperation with KITE, will also be at the frontiers of the global immune-cell research. Moreover, KET-C19 indications cover around 160,000 patients, with a potential market size of RMB16 billion, and all three products have not satisfied clinical needs, with an estimated potential market size of more than RMB50 billion.

It is also worth mentioning that the company has secured the top 3 in domestic monoclonal antibody (McAb), and the two technological platforms, McAb and Car-T, are expected to create synergistic effects and help the company to become a benchmark in China's biological tumor treatment industry. At the same time, the company once again adopts JV model following the JV cooperation with Intuitive Surgical, proving its capability to cooperate with international top pharmaceutical companies. The model is likely to be duplicated in future expansion and support the company's international expansion.

McAb R&D Takes the Lead

At present, the rituximab and trastuzumab of Henlius are undergoing the Phase III clinical trial, and are expected to appear on the market in 2018 and 2020, respectively, and another three McAbs are in Phase I and one has obtained the clinical approval document. Rituximab US patent expires in 2018, which means the cost-effective domestic generic drugs are expected to quickly seize the lymphoma drug market, with an estimated penetration rate of 50% and a corresponding market size of approximately RMB2.3 billion. The company, following CPGJ in submitting the listing application, still takes the lead. Overall, since 2016, Henlius has significantly improved its R&D efficiency, coupled with well-established product lines and Fosun's strong sales capability, we expect Henlius to lead the domestic McAb field.

All-round Layout Supports Steady Growth

Fosun Pharma is also the second largest shareholder of Sinopharm Group, China's largest pharmaceutical distributor. It has, in the medical service sector, nearly 7,000 beds（including beds in construction and not been included in the consolidated financial statement）, coupled with agent cooperation of such medical devices as Leonardo's robot, the company has made a layout throughout the whole industrial chain of medical and healthcare industry. We expect the company to maintain an annual growth of 20%+, since the biotech layout of McAb and Car-T is expected to rapidly lift its R&D level, the acquisition of Gland Pharma in India will promote its internationalization, and China's two-vote system reform and other reforms will also increase the market share of medical distribution and service business. We grant the company an estimation of 17.5x EPS in 2017 and a target price of HKD29.5, with the "Accumulate" rating. (Closing price as at 18 Jan 2017)

Risks

Drug price drop above expectation;

Acquisition and integration below expectations;

Geopolitical risks in the expansion of overseas business.

Financials

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