Livzon Pharmaceutical reported 1Q18 net profit of Rmb347m （+26.3% YoY）， including Rmb77m ingovernment subsidies. Recurring net profit rose 19.6% YoY to Rmb285m, accounting for 28% of ourfull-year estimate. Revenue grew 11.4% YoY to Rmb2.4bn. We revise down our diluted EPS forecastsfrom Rmb1.85 to Rmb1.82 in 18E （-77% YoY）， from Rmb2.11 to Rmb2.05 in 19E （+13% YoY）， and fromRmb2.40 to Rmb2.32 in 20E （+13% YoY）。 Our target price is unchanged at HK$59.00, implying 26x 18EPE. With 3% upside, we maintain our Hold rating.
Disappointing sales for Shenqi Fuzheng, Likangle and Beiyi. Sales of Shenqi Fuzheng fell 24% YoY in1Q18 while that of Likangle （mNGF） dropped 18% YoY during the same period. We think Likangle mayrecover to positive growth in coming quarters after re-entering the Guangdong market in 1Q18.
Nevertheless, the new National Reimbursement Drug List （NRDL） added reimbursement restrictionsfor Shenqi Fuzheng and Likangle, which has imposed negative impact on sales from 4Q17. In addition,given Shenqi Fuzheng and Likangle are adjuvant drugs, clinical use is tightly controlled by theauthorities. Thus, we forecast sales of Shenqi Fuzheng to decline 15% YoY in 18E, while Likangle salesremain flattish in 18E. In addition, Beiyi （leuprorelin microsphere injection） grew by 22% YoY in 1Q18,below our expectation. This was mainly due to a low fertility rate, in our view.
Yili’an and other products performed well. Sales of Yili’an （ilaprazole） grew 45% YoY to Rmb140m,representing 6% of Livzon Pharma’s total sales. Fast growth in Yili’an was mainly because the newNRDL includes Yili’an as a “type 2” drug for the second-line treatment of duodenal ulcers. Meanwhile,Yili’an received China Food & Drug Administration （CFDA） approval for a new indication,gastroesophageal reflux disease （GERD） in September 2017. The CFDA also approved the injectionformulation of ilaprazole in January 2018. We expect c.Rmb60m sales from ilaprazole injection in 18E.
Due to flu outbreaks, anti-viral granules and voriconazole injection delivered 37% and 60% YoY salesgrowth in 1Q18, respectively. In addition, rabeprazole also recorded 67% YoY sales growth in 1Q18.
Remain positive on Livzon’s R&D pipeline. To date, Livzon has received clinical trial approvals for fivemonoclonal antibodies. Of these, its anti-TNF alpha monoclonal antibody is currently undergoingphase-II clinical trials. We expect it to hit the market in 2020E, becoming Livzon’s first commercialisedmonoclonal antibody.
Maintain Hold. On 16 April, H-shareholders voted down the firm’s proposed stock incentive plan,under which a total of 15m A-share options would be vested within the next three years, covering1,045 employees. In addition, the company sold a 15% stake in its API subsidiary, Livzon Xinbeijiang,to the management team of the subsidiary at a consideration of Rmb66m. Although the valuation ischeap at 5x 17A PE and 0.9x PB, we think this will help to align the management team’s interests withshareholders. We revise down our diluted EPS forecasts from Rmb1.85 to Rmb1.82 in 18E （-77% YoY），from Rmb2.11 to Rmb2.05 in 19E （+13% YoY）， and from Rmb2.40 to Rmb2.32 in 20E （+13% YoY）。 Ourtarget price is unchanged at HK$59.00, implying 26x 18E PE. With 3% upside, maintain Hold rating.