South Korea’s Celltrion Inc. (Incheon) gets EU green light for Herceptin biosimilar

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The News:

Celltrion Inc. said on February 14, 2018 that it has received approval to sell its replica version of Roche Holding AG’s (Basel CHE) breast-cancer blockbuster Herceptin in Europe.

The European Commission granted marketing authorization for Herzuma for the treatment of early breast cancer, metastatic breast cancer and metastatic gastric cancer, according to The Investor.

Herzuma is Celltrion’s third biosimilar that will hit the European market, following its version of Johnson & Johnson’s (New Brunswick NJ) Remicade called Remsima, and Truxima, another copy of Roche’s med Rituxan.

The approval follows the EC’s approval of cross-town rival Samsung Bioepis Co. Ltd.’s trastuzumab biosimilar, Ontruzant, in November last year. Samsung Bioepsis is a joint venture between Samsung Biologics Co. Ltd. and Biogen Inc. (Cambridge MA).

Ontruzant was Europe’s first Herceptin biosimilar.

Both companies expect to launch their products in the first half of 2018.

This decision by the EC means that Herzuma is now approved for marketing in the 28-member states of the EU, in addition to Norway, Liechtenstein and Iceland. Europe is an important market for Celltrion as it accounts for some 80% of its total biosimilar sales as European countries increase uptake of the lower-cost facsimile versions to reduce healthcare spending. Discounts of biosimilars are around 30% on average in Europe.

“We have already seen many benefits of biosimilars in Europe from our experience with Remsima and Truxima. Our experience has shown that biosimilars not only reduce individual patient’s out-of-pocket medical expenses but also contribute to lowering the financial burden on insurance payers and national health agencies,” said Woosung Kee, CEO of Celltrion.

With the upcoming launch, Celltrion is seeking to carve into the original drug’s European market share which is valued at some 2.45 trillion Korean won ($2.26 billion).

In the US, Herzuma’s approval is being reviewed by the Food and Drug Administration.

Steve’s Take:

I’ve been watching the PyeongChang Winter Olympics and marveling at just how ingenious and beautiful the indoor and outdoor venues are. Well, those that are heated. And my hat’s off to the diminutive country’s organizers and leaders who have delivered a global-sized sports venue par excellence. All the more amazing with the persistent military threat of its brash northern neighbor with its test missile launches, and so on.

But some of South Korea’s other national champions who’ve been catching “big air” are competing in another venue and blowing the socks off some of the biggest and brightest stars in Pharma, namely, biotech firms Celltrion and Samsung Biologics.

Bill Alpert for Barron’s calls them the “overachievers that they are,” as Koreans have lifted the stocks of these firms to world-record multiples. “When gravity finds them, the crash will be epic,” Alpert warns.

Both firms are the biotech industry equivalent of a generic drugmaker, concocting “biosimilar” versions of off-patent products like the arthritis treatment Remicade from Johnson & Johnson (New Brunswick NJ).

Since their 2005 debut on Korea’s tech-oriented Kosdaq exchange, Celltrion shares have risen 50-fold in a Bitcoin-esque hysteria that made Celltrion the most actively traded stock in Asia last year. Even after retreating from its recent peaks, Celltrion’s stock price on (February 15) of 312,500 Korean won makes for a market valuation that’s equivalent to $36.8 billion, representing multiples of 40-times expected sales for 2017 and 105-times earnings.

But that’s not all that investors have bet on the biosimilar maker. Celltrion spun out two units called Celltrion Healthcare and Celltrion Pharm, which trade for similar multiples of their related-party business with their parent. They add another $18 billion to the group’s market cap.

Samsung Biologics has barely been in business for five years, but on the main Korean bourse its stock goes for 436,000 KRW and values the company at almost $27.1 billion. The venture has yet to make a profit, but if its fans are correct in their 2018 forecasts, Samsung Biologics is trading for 46-times this year’s sales and 280-times profits.

Korean investors are paying $82 billion for two entities whose combined earnings will be lucky to exceed half a billion dollars this year. The country’s whole KOSPI index trades for less than 10-times 2018 earnings. That’s simply bonkers.

Looking at that $82 billion bet another way, the market cap of these Korean bio companies exceeds the $65 billion in current sales of the original biotech products that they have said they’ll copy. And they won’t be the only ones hunting riches.

Steve's Take: @CelltrionDream may become a dream investment, but it also has the very real potential of becoming a nightmare, especially at today's price-to-earnings ratios #bonkers Click To Tweet

Biosimilars are being developed by nearly every big pharma firm on the planet, so the aggregate revenue of the category is certain to wither with price competition. That means the target market for Korea’s $82 billion bet surely won’t remain at $65 billion.

Understandably, Korean brokerages have been supporters for both companies. Samsung Biologics’ overseas underwriters included Citibank, JP Morgan and Credit Suisse, so perhaps it’s no surprise that JP Morgan’s analyst started coverage last month, with an overweight rating and a price target some 30% above current levels.

But among the few willing to acknowledge the distinct probability of a bubble are Deutsche Bank, which thinks Samsung Biologics should trade 60% lower, and Morgan Stanley, which thinks Celltrion deserves an even bigger haircut.

But biotech is also bursting back to life in the US, and the enthusiasm is being felt across the Pacific, notes Shull Ren for Bloomberg.

The Asian biotech companies have a big market at which to aim. Warren Buffett compared ballooning US medical costs to a “hungry tapeworm” in announcing Berkshire Hathaway Inc.’s move into health care recently in partnership with Amazon.com Inc. and JPMorgan Chase & Co.

Whether these goliaths succeed in reigning-in their own healthcare expenditures given the completely entrenched extant business sectors is anyone’s guess at this early juncture. But biotech isn’t going to shrink whether or not they do.

As of 2016, biologics totaled more than $130 billion in sales and accounted for nine of the 15 most sold drugs globally. In theory, if one goes off the patent cliff, incoming generic manufacturers should have no trouble snatching away cost-conscious patients.

Bottom Line:

One look at Celltrion’s drug pipeline and it’s easy to see why the company is so well liked by foreign investors, says Ren. But plenty of skeptics persist.

In 2016, Rituxan and Remicade reaped just over $10 billion in sales in the regions where Celltrion has approval; by comparison, the two listed Celltrion entities generated little more than $1.2 billion.

In late January, US-based hedge fund Lakewood Capital Management disclosed a short position in Celltrion Inc., arguing the company’s true revenue and profit are probably 50% below reported levels.

Korean analysts aren’t providing much help and are notoriously slow to update research and valuations. While 17 of 21 analysts covering Celltrion rate the stock a buy and a mere three rate it a sell, the consensus nevertheless sees the shares at only 194,371 won in 12 months–a whopping 38% below the current market price. Hello out there!

Biotech offers more of a challenge for investment analysts than the broader technology sector.

Ren says, “Whereas everyone can chime in on tech, you have to understand the chemistry, the drug pipeline, the government regulations, and have a reasonable estimate of the probability of drug approvals, to cover biotech.”

I whole-heartedly agree with him that just looking at historical price-to-earnings ratios doesn’t cut it.

Asia’s biosimilar drugmakers promise to prosper by curing diseases at a deep discount. That’s great for patients. But for investors, these businesses should probably carry a “you’re gambling” warning until results start to vindicate their monster-big-air stock prices.

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