Consun Pharmaceutical Group - From single product to multiple drivers
- Our previous TP was based on 6x 24F; rolling over to 12-month forward PE of 6x, we derived a higher TP of HKD7.8
- Uremic clearance granules have been contributing >50% of sales for a decade. At least 3 products emerging as new sales drivers, making up c.20% of sales with expected sales CAGR of 35% in 24F-26F
- Despite UCG’s patent expiry in Mar 2024, our analysis suggests it is difficult for others to copy it and produce generic version
- Maintain BUY for EPS CAGR of 16% in 24F-26F and potential re-rating of the stock due to emergence of new sales drivers
Re-rating on the way, thanks to new sales drivers emerging. For a decade, the group has been relying on uremic clearance granules (UCG) to generate >50% of its earnings and sales. Due to the concentration risk, Consun is developing new sales drivers. There are three products that aggregately contributed c.20% of sales in 2023, which we think can be new sales drivers:
- Iron dextran oral solution, used to treat iron deficiency anemia, is estimated to have made up c.11% of the group’s sales in 2023. It was previously restricted for use on children only. The Chinese Government removed the restriction on 1 Jan 2024. We believe there is huge demand for this product among women before and after childbirth. We expect its sales growth could accelerate from 20% in 2023 to 30%/38%/38% in 24F/25F/26F.
- Medical contrast medium, which made up 6% of 2023 sales. It is injected into patients before medical imaging to improve image quality. Consun has two new products in this segment that have completed all clinical trials – Iodixanol injection and Iopromide injection – and are pending regulatory approval for launch. We expect the sales growth of this segment will accelerate from -5% in 2023 to 15%/30%/30% in 24F/25F/26F.
- Kidney repair & edema alleviation granules, used to tonify the spleen, transform renal dampness, and induce diuresis to alleviate edema, made up c.3% of the group’s sales in 2023. This is a modern Chinses medicine. The group will initiate a new round of clinical trials based on international standards to demonstrate its efficacy this year. It takes around three years to complete the trial. In the meantime, Consun will release mid-term clinical data about the trials, which can strengthen market confidence and boost sales. We believe the clinical trial will likely succeed, as the Diabetic Nephropathy Combined Diagnosis & Treatment Guide issued by the Chinese Medical Association (established in 1915, and authorised by the government to issue medication guides for the industry), gave a strong recommendation for this drug. The sales growth of this drug in 2023 was 35%, and we believe annual growth can be sustained at 35% till 2026.
Consun ’s chairman arranged a 2023 results call for investors on 28 Mar 2024. He shared publicly that the group will accelerate the search of acquisition targets for medicines to treat kidney disease. This is crucial for the long term, as it can increase the number of sales drivers.
Despite UCG’s patent expiring in Mar 2024, our analysis suggests it is difficult for other players to copy it and produce a generic version. After the expiry of the patent for UGC, Consun has to disclose the ingredients of the drug. There are 16 ingredients/herbs used in it. However, it does not need to disclose the production procedure (e.g., which herb should be handled first, what is the optimum temperature for handling them, etc.), which is crucial for quality control. Furthermore, UCG is a modern Chinese medicine, not a chemical drug, so its active ingredient and molecular structure are not that clear, making it harder to replicate.
We reviewed 28 modern Chinese medicines for which the protection period ended between 11 Jan 2022 to 18 Jan 2023. During the protection period, companies without protection granted by the government cannot produce the medicine. Among those 28 medicines, we looked at those that use 10 or more ingredients, namely: Qing Re Zhi Ke granules (清热止咳颗粒), Jie Shi Kang capsules (结石康胶囊), Qi Huang Tong Mi soft capsules(芪黄通秘软胶囊), Lian Can Tong Lin tablet (连参通淋片), Hong Hua Xiao Yao table (红花逍遥片), Shen Bao tablet (肾宝片), Die Da Qi Li tablet (跌打七厘片), Tong Luo Qu Tong ointment(通络祛痛膏), and She Xiang Zhui Feng Zhi Tong ointment (麝香追风止痛膏). We visited the website of the National Medical Products Administration to check if other drugs were being produced under the same generic name. Our findings revealed there were none. We believe a major reason is because a modern Chinese medicine that uses over 10 ingredients is hard to copy. As such, UCG should be even harder to replicate, as it uses 16 ingredients.
Maintain BUY. We maintain BUY on re-rating potential driven by the three new sales drivers and M&As.
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