More thoughts on Essex Bio
On their potential long term growth
Written on 15 May 2023
On my last article, I have mainly touched on the short term outlook and the potential downside for Essex Biotech 1061.HK.
Essex Bio-Technology Limited, an investment holding company, develops, manufactures, distributes, and sells biopharmaceutical products in the People’s Republic of China and internationally. The company operates through Ophthalmic Products and Surgical Products segments. It researches and develops basic fibroblast growth factor products for the treatment of cellular proliferation, differentiation, and migration.
The company offers Beifushu series, such as Beifushu eye drops, Beifushu eye gel, and Beifushu unit-dose eye drops; Tobramycin eye drops, Levofloxacin eye drops, and Sodium Hyaluronate eye drops, as well as Iodized Lecithin Capsules. It also provides Beifuji sprays and lyophilized powder, and Beifuxin gels for use in burn and scald wounds, acute wounds, surgical incisions, chronic wounds, skin grafting, and other applications. In addition, it offers ophthalmic and surgical products from third parties. Further, the company offers Carisolv dental caries removal gel; and Yi Xue An Granules. It has license agreements with Mitotech S.A. and Mitotech LLC. The company was founded in 1990 and is headquartered in Zhuhai, China.
After talking to more people in the industry, there might be a thesis on the long term as well.
I shall touch on a few points.
1. The Amendment in Co-Development License Agreement with Henlius
Market reaction: Horror on the thoughts of increasing cost!
My question: Why the increase in cost?
Official answer: There is a need to increase the funding as there is a need to ensure that the new clinical trial sites in the United States and Europe helps to support and balance requirements imposed by various regulatory authorities for a successful trial.
My interpretation: There is a ongoing trade war between China and US. There is a need to establish new and more clinical trial in United States and Europe otherwise there will be no approval from United States and Europe!
2. Business update on SkQ1
Market reaction: Sounds like a dodgy deal…
My question: Why is there such a sweet heart deal from Mitotech?
Official answer: Mitotech needs help in US FDA VISTA program (the clinical studies on an ophthalmic solution containing SkQ1 for the dry eye disease).
My interpretation: There is a new cold war between Russia and the US. Mitotech cannot get FDA approval unless Essex takes over the global rights (excluding Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia).
3. Continued growth?
Market reaction: There will be lesser growth in the coming years
My question: Basic fibroblast growth factor (bFGF) has been in the Chinese market for a very long time, will the growth taper off?
Official answer: As at 31 December 2022, the Group maintains a network of 43 regional sales offices in the PRC and a total number of about 1,240 sales and marketing representatives...The Group expanded its presence in Singapore in 2020 as a base for market access expansion into Southeast Asian countries.
My interpretation: The company is going to continue growing their China revenue without a significant increase in expenses through additional clinical indication, wider distribution in lower-tier cities in the PRC through online and pharmaceutical stores. Starting with Singapore, they are looking to expand into ASEAN through the ASEAN Pharmaceutical Regulatory Policy with Malaysia and Indonesia as the possible markets. That looks like growth to me!
In my last article, I have sort of underwrite that the market does not seem to be pricing in the recovery of Essex Biotech post Covid.
In this article, I have sort of underwrite that there are good options in some of their new potential drugs and growth plans.
With a pharmaceutical company which is primed to perform well in the short term and possibly in the long term as well, should Essex be trading at this level?
Please check my latest trades and their justification below.
Updated: 17 May 2023
Essex Biotech (1061.HK) - HKD 3.60
2023 January: Essex Biotech $1061.HK (Essex) purchased at an average price of HKD 3.74 is primarily selling ophthalmology and surgical (wound care and healing) in China. The defensibility of their product comes from the patent and their willingness to price their goods in an affordable manner With Covid ending, sales should normalise to the pre-covid era. If the assumption is a normalisation of earnings for FY2023, then net profit should be around HKD 302m (2019) and HKD 345m (2021). Taking a median of these two number - HKD 323.5m meant that Essex trade at 6.6x PE. Since Essex has consistently average more than 20% in ROE every year except the 2 Covid years of 2020 and 2022, this look undervalued even for Hong Kong “standard”. In addition, there are multiple options within Essex. New drugs like SkQ1 with Miotech, anti-VGEF with Henlius could provide the long term growth prospect. Newly acquired drug like Iodised Lecithin Capsules should provide some growth in the medium term. The biggest worry is the possibility of write down of goodwill - SkQ1 (HKD 354m), anti-VGEF (HKD 215m) and Iodised Lecithin Capsules (HKD144m), otherwise FY 2023 should be a much better year for them.
Betting that the FY2023 numbers would be closer to FY2019 than FY 2022. Share buyback could help to support share prices.
Essex will be a sell if there is increasing evidence that there would be a write down in their goodwill or if they are facing formidable-new competitors in their traditional segment of ophthalmology and surgical care.
Codan (CDA.AX) - AUD 6.96 (CLOSED)
2022 November: Codan Ltd $ASX:CDA purchased at an average price of AUD 3.908 develops, manufactures, and markets metal detection equipment, such as handheld metal detecting technologies for recreational, gold mining, de-mining, and military markets. Their main profit driver is the artisanal mining in Africa. With political headwinds within the parts of Africa and the end of covid, the sales of high end handheld metal detector had dropped. Their recreational division could also be affected as more people goes back to work. Codan have recently started to build up another division known as the communication division. This division supplies critical communication equipments for companies and the military. With conflict potentially brewing all over the world, the communication business should be satisfactory? Overall, there is some risk that there is diworsification but the new CEO Alf Ianniello is taking over a company which have been very well managed and he seems intend to continue doing so. Valued at 10x PE, this may be the chance to pick up a high ROE, decent growth company for the long term?
Betting that Codan would be revalued by the public either due to rising gold price rising or rising defence spending.
Codan will be a sell if the communication division could not get any tractions or the artisanal mining division continue to shrink.
Exited at AUD 6.965 for a 86.52% on 2023 March as Codan seems to be price for a perfect execution on the metal detection and communication division.
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