After closing on June 25, Jacoson Pharmaceuticals (Jacobson) announced that its net profit for the fiscal year ended March 31, 2018 was HK$0.202 billion, and its core profit of HK$0.192 billion (down 5% year-on-year) was lower than our estimate of 6%, mainly due to lower pharmaceutical sales and higher tax rates. We believe that (1) sales of generic Western medicines are sustainable, and (2) high-value biotechnology and diagnostic products can be sold, but this has not yet been included in our sales budget. Due to lower drug sales forecasts, we lowered our total segment price target to HK$2.35, maintaining a “buy” rating. FY2018 results fell short of expectations, and sales of generic Western medicines remained sustainable. On June 25, 2018, Jacobson Pharmaceuticals (Jacobson) announced that its net profit was HK$0.202 billion, and its core net profit fell 5% year-on-year to HK$0.192 billion, below our expectations of 6%. This is mainly due to (1) lower revenue from Western generic drugs and proprietary Chinese medicines; and (2) higher than expected tax rates. Our overly optimistic sales estimates, the pricing pressure for specific cardiovascular drugs and the decline in antibiotic usage in Hong Kong combined to reduce the company's FY2018 sales by 4%. At the analyst briefing, management believed (1) the price of respiratory medicine will rise, and we expect the sales price to increase by 3% year-on-year in FY2019; (2) with highly optimized capabilities and high-quality drug supply, the company can resist competition from overseas generic drug companies; and (3) revenue prospects based on new tenders for new drugs. Additionally, we reduced Western medicine generic sales by 3%/1% for the 2019/2020 fiscal year, respectively. The profit growth rate for the 2019/2020 fiscal year is expected to return to 18%/23% on an annualized basis. Proprietary Chinese medicine sales increased 21% year-on-year to HK$0.192 billion, below our expectations of HK$0.263 billion. In particular, in the second half of FY2018, sales in this sector fell 20% year-on-year to HK$69 million, deviating from our expectations of HK$0.139 billion, mainly due to the following sales declines: (1) Flying Eagle Oil due to the consolidation of sales channels in China; and (2) Hong Kong's Baoji Pills. As a result, we lowered our fiscal year 2019 sales budget for proprietary pharmaceuticals (from HK$0.315 billion) to HK$0.219 billion, and the FY2020 budget (from HK$0.363 billion) to HK$0.252 billion. Overall, we reduced our total revenue forecast for FY2019 and FY2020 by 6%/5%, respectively. Although higher full-year financial expenses had an impact on our forecasts, we reduced the FY2019/FY2020 ratio from 24.0%/24.4% to 22.4%/22.8%, respectively, based on an improvement in operating expenses as a share of sales. As a result, our profit forecast for these two fiscal years decreased by 7%/4%, respectively, showing an annual growth rate of 18%/23% (FY2018: -5%). The total segment target price was lowered to HK$2.35; the buy rating was maintained. The company aims to (1) pass all commercial regulatory competencies and guidelines for its trastuzumab biosimilar drug (trastuzumab) authorized by Shanghai Fuhong Hanlin Biotechnology Co., Ltd. (a subsidiary of Fosun Pharmaceutical (2196.HK, unrated)); and (2) obtain licensing agreements with other multinational companies to develop biomedicines. We lowered our total segment price target to HK$2.35 (from HK$2.50), implying 20.8 times the FY19 price-earnings ratio (previous value: 20.5 times) or 13.5 times EV/EBITDA, which is 1.5 standard deviations higher than the average price-earnings ratio predicted by the industry over the past five years. The rationality of our valuation is based on the company's (1) dominant market share for Hong Kong hospitals and pharmacies as the largest Western medicine generic manufacturer in Hong Kong; and (2) more participation in the high-growth and high-valuation biologics sector.