China Resources Pharmaceuticals:CR Sanjiu partners with Sanofi on liver-protecting drug license-in and OTC joint venture

What’s New - CR Pharma’s key OTC platform subsidiary China Resources Sanjiu(000999.SZ, Not Covered) has announced that the company has signed a frameworkagreement with Sanofi for consumer healthcare business. The collaborationproposed includes: 1) a joint venture to be set up by both parties to focus onpediatric and gynecologic OTC medicines; 2) a 10-year exclusive marketing /distribution right for Sanofi’s liver-protecting OTC drug Essentiale capsules(polyenylphosphatidylcholine or PPC) in China for CR Sanjiu; and 3) 10-year initialnegotiation rights (INRs) for Sanjiu for potential future license-out deals from Sanofi’sconsumer healthcare business unit. The deal is pending regulator approval.

More on Sanofi’s Essentiale - PPC is one of the third largest liver-protecting agentsin China, accounting for 13.7% in 9M16vs. magnesium isoglycyrrhizinate (i.e. SinoBiopharm’s Tianqing Ganmei) 20.6% and compound glycyrrhizin 14.6%, two licoricebasedmedicines. Sanofi’s Essentiale was approved in 2002by CFDA as a supportivetherapy for patients with liver injury induced by drugs, toxicants, chemicals oralcohols, fatty liver diseases and hepatitis. There are two formulations in the market:1) c. 25% sales from capsules, for which Sanofi is the exclusive manufacturer (i.e.the one licensed out to CR Sanjiu); and 2) injections, c. 75% of total PPC market, inwhich Hasco/Chengdu Tiantaishan is the dominant player (95% of market share),based on our tracking of sample hospital database (PDB database).

Potential implications for CR Pharma –While details have not been fully disclosed(e.g. deal size and sales of Essentiale capsule), we see synergies from the deal,which could combine Sanofi’s brand names in consumer healthcare, quality productsand channels in the higher-end market with CR Sanjiu’s extensive retail pharmacycoverage and experience in promoting pediatric (CR Sanjiu is a leading pediatric OTCbrand in China) and gynecologic OTC products. In addition, the deal is consistentwith CR Pharma’s expansion strategies for the manufacturing segment, leveragingM&A and external collaborations to diversify its product portfolio (see our initiationreport).

We rate China Resources Pharma Buy with HK$10.8412m TP based on discountedlong-term P/E. Key risks: Slower M&A progress, price cut in generics, loss of controlover Dong-E-E-Jiao, management execution risks and Rmb depreciation againstHKD. Dec 2close: HK$8.60.