The growth outlook is constrained by Carnitene-Lee's income of HK $450 million in the first half of 16, down 5.9 per cent from a year earlier. Carnitene sales were sluggish, falling 13.3 per cent to HK $157 million. We expect the market environment to be more severe in the second half of the year, based on: 1) further price reductions brought about by bidding in more provinces; 2) intensified competition with generic varieties; and 3) over-indication drugs are regulated. We expect Carnitene to record HK $2.86 million in revenue in fiscal year 16-18.
Sales strength has been weakened-as Lee is gradually reducing his own sales team, the cost of sales as a share of total revenue fell 4.8 percentage points to 24.6% in the first half of the year. Due to the adjustment of sales strategy, we expect Zainingping (down 34.2% in the first half of the year compared with the same period last year) to continue to be under pressure in the near future. Lee's other existing products still rely mainly on third-party agents for promotion.
New product contribution-Lee is currently committed to the growth of new products (Remodulin, Gaslon N and oral levocarnitine) to make up for the vacuum between existing products and long-term products under development. We still believe that the future of the pulmonary hypertension drug Ramodulin is something to look forward to and have the opportunity to get health insurance support. The newly listed products are expected to contribute HK $50 million in revenue in FY16 and gradually grow to HK $238 million in FY18.
The R & D environment is extremely challenging-Li withdrew his application for trazodone listing because the FDA required the industry to conduct self-examination of clinical data. Recently, the regulatory authorities have adopted a stricter attitude towards the authenticity of clinical trials, the market speed of new drugs has significantly slowed down and the cost of research and development has begun to rise. At the same time, considering that Li has more products under research and development in the later stage of research and development, we expect the proportion of R & D costs to increase from 7.5% in 16 years to 10% in 18 years.
Updated model with a new target price of HK $8.00-We expect earnings per share for fiscal year 16 to be HK $0.35 on revenue of HK $942 million. The new target price of HK $8.00 corresponds to 23 times and 20 times 16-and 17-year earnings per share, respectively. This valuation takes into account the prospect of the products under development. At the same time, we believe that the data update of the main R & D products (Amfibopeptide, rotavsin, Istasar, etc.) will be a catalyst to boost the stock price. The rating is adjusted to neutral.
