2Q22 preview: solid results in line with consensus
We now expect Chong Kun Dang Pharmaceutical to post a standalone operating profit of KRW 28.4 billion (-15.6% YoY, 8.0% operating margin) on sales of 357.3 billion KRW (+9.3% YoY) for 2Q22, in line with consensus estimates. Company-wide sales growth was likely driven by continued sales of flagship products such as K-CAB, Prolia and Atozet. Sales of Lipilou, hit hard by a temporary ban on production and sales imposed by the Ministry of Food and Drug Safety in 2021, appear to have returned to normal levels. Sales of Prolia are expected to jump 40% YoY or 18% QoQ to KRW 25.6 billion in 2Q22 on market share gains as a first-line treatment option for the osteoporosis. Despite revenue growth driven by flagships, we believe operating profit fell year-over-year due to: 1) increased R&D spending alongside progress in clinical trials for major pipeline projects; 2) settlement of costs related to the recent decision to suspend clinical trials for Nafabelltan injections as a COVID-19 treatment; and 3) supplies set aside for flu treatments, including Tamiflu.
Profitability to enhance the strong performance of top-selling drugs
For 2022, we forecast sales at KRW 1.43 tr (+7.4% YoY) and operating profit at KRW 108.2 billion (+15.0% YoY, operating margin of 7 .6%). Sales of K-CAB, Prolia and Atozet should remain strong in 2H22. R&D spending is likely to increase further (KRW 162.5 billion in 2021 → KRW 171.9 billion in 2022F) following progress in clinical trials. Nonetheless, the company should benefit from double-digit operating profit growth and visible margin gains for the full year thanks to operating leverage driven by revenue growth. high-margin products. With R&D spending accounting for the lion’s share of general and administrative expenses, slower-than-expected R&D spending could lead to further profit increases in 2H22.
Target price lowered to 100,000 KRW; wait for R&D results
We are lowering our target price for Chong Kun Dang Pharmaceutical from KRW 110,000 to KRW 100,000, reflecting the enterprise value estimate based on a 12-month forward EBITDA of KRW 154.8 billion, an EV/EBITDA target of 7.9x and net cash. In addition to strong earnings from existing products, the company will need to show notable results on R&D pipeline projects for shares to see a boost. In the near term, results from the follow-up clinical trials of CKD-510 and the Phase I (Part 2) trial of CKD-702 should provide momentum for future action.