Morningstar | Chugai Posts Strong Q1 Thanks to Sales of In-House Drugs, FVE Revised to JPY 6,500. See Updated Analyst Note from 26 Apr 2019
Narrow-moat Chugai Pharmaceutical announced Q1 earnings that showed strong operating margins of 30%, an increase of 380 basis points year-over-year, or 200 basis points using Chugai’s core earnings. This was driven by increasing sales contribution from higher-margin in-house drugs, which improved gross margins. This is better than our expectations, and we believe it will be sustainable. As a result, we revised our fair value to JPY 6,500 per share from JPY 6,000 per share.Revenue this quarter grew 4.7% year-over-year, which is in line with our expectation. Gross profit margins (calculated as a percentage of product sales only, excluding royalties) improved to 54%, an increase of 480 basis points year-over-year, which is better than our projection of 52% for the full year. This was primarily because revenue contribution from in-house developed drugs grew to 49% this quarter from 45% last year. In-house drugs have higher gross profit margins compared with in-licensed drugs from its parent Roche or other drugmakers. We believe this improvement in product mix will be sustainable and warrants better gross margin assumptions.
The key drugs behind the product-mix changes are Actemra, whose revenue contribution increased  to 24.9% this quarter from 22.5% last year, and Hemlibra, whose contribution increased to 2.5% from 0.5% in the same period. We believe Actemra is nearing its peak revenue period, so it will probably not drive further margin improvement in the future, but Hemlibra is still in the very early stages of its life and will likely continue to improve gross margins.
We raised our fair value to JPY 6,500 from JPY 6,000, primarily because of more-optimistic gross margin assumptions. While the company trades at a 9% premium to our new valuation, we would like to note that faster uptake of Hemlibra will likely warrant further increases to our assessment.
Chugai Pharmaceutical is a pharmaceutical company. Along with its subsidiaries, Co. is engaged in the research and development of new prescription medicines and the subsequent manufacturing, marketing and distribution activities. Co. sells its pharmaceutical products to the nationwide appointed stores in Japan, as well as in overseas, such as Germany, the U.K., France, Taiwan, China, South Korea and the U.S. Co., through its subsidiaries, is also involved in the management of research facilities, and the research on drug discovery, as well as the provision of literature research services for pharmaceutical information, and pharmaceutical academic information.
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