June 7 (NBD) -- The market value of Jiangsu Hengrui Medicine Co., Ltd. ("Hengrui Medicine", 600276.SH) hit 303.5 billion yuan (47.5 billion U.S. dollars) as of the market close on Wednesday, becoming China's first pharmaceutical stock whose market cap crosses the mark of 300 billion yuan (46.9 billion U.S. dollars).

High market cap accompanied by climbing PB, PE

Hengrui Medicine saw an year-to-date increase of 55.52 percent in its shares. The company now takes the first place in the A-share pharmaceutical sector in terms of market cap, far surpassing second-placed WuXi AppTec Co., Ltd. (603259.SH) and third-placed Kangmei Pharmaceutical Co., Ltd. (600518.SH) either of which market value stands less than 130 billion yuan (20.3 billion U.S. dollars)

But globally, Hengrui Medicine only ranks 28th among all listed pharmaceutical enterprises and Johnson & Johnson (JNJ) which takes the throne is valued at 2 trillion yuan (312.9 billion U.S. dollars).

Hengrui Medicine's high valuation is accompanied by the considerably higher PB (Price/Book value) and PE (Price/Earnings) than its peers.

According to data from financial information portal Wind, Hengrui Medicine's dynamic PE and PB hit 90.47 and 18.51, whereas the corresponding medians of the pharmaceutical field are 40.71 and 6.58.

When comparing Hengrui Medicine with the world's top ten medical enterprises in valuation, only three of them have a higher dynamic PE than Hengrui Medicine and only two including JNJ have a higher PB than the Jiangsu-based medical company.

Although Hengrui Medicine does have higher rate of return on common stockholders' equity (ROE) than the industry average, yet it only took the 18th place in terms of ROE last year.

Wide gap with int'l peers in R&D spending 

Sustained R&D capability is crucial to pharmaceutical enterprises. 

Hengrui Medicine's successfully developed innovative drugs are just a result reaped by the continuous input in R&D.  

According to the pharmaceutical company's annual report for 2017, it spent around 1.8 billion yuan (275.2 million U.S. dollars) on R&D last year, representing a rise of 49 percent from a year ago and accounting for 12.71 percent of its total sales revenue. 

Data shows Hengrui Medicine ranks top among healthcare companies listed in the A-share market in terms of R&D spending and R&D expenses to revenue ratio. 

However, it still has a big gap with international counterparts. 

According to "The top 15 spenders in the global drug R&D business: 2016" released by the independent news organization Endpoints News, Swiss multinational healthcare firm Roche topped the list with a spending of up to 11.4 billion U.S. dollars. 

In contrast, the combined R&D expenses of all healthcare companies listed in the A-share market was 31.6 billion yuan (4.9 billion U.S. dollars) last year.  

In terms of the R&D expenses to revenue ratio, U.S. healthcare company JNJ came in the last place in the Endpoints News list for 2016 with a ratio of 13 percent, which is still higher than Hengrui Medicine's 2017 level.

Stock price beats expectations of financial institutions

According to the market research reports from Wind, 27 securities companies have set target price for Hengrui Medicine in a span of 180 days. The stock price of Hengrui Medicine closed at 82.01 yuan (12.8 U.S. dollars) per share Thursday, exceeding the agreed target price of 74.6 yuan (11.7 U.S. dollars) a share by over 10 percent.

NBD noticed that three securities companies set higher target price for Hengrui Medicine.

Guotai Junan Securities Co., Ltd. (601211.SH) noted that Hengrui Medicine's anti-tumor drugs like Paclitaxel-albumin, pyrotinib, and PD-1 are expected to hit the market soon, which may push its share price to a higher level. Guotai Junan gives a target price of 98.7 yuan (15.4 U.S. dollars) per share.

CITIC Securities Company Limited (600030.SH) is also bullish on its anti-tumor drugs. Moreover, Hengrui Medicine’ Fondaparinux sodium injection gained registration approval from the FDA last month. CITIC Securities held that Hengrui Medicine has a sound product mix and R&D management system and sets its target price at 112 yuan (17.5 U.S. dollars) per share.

Zhongtai Securities Co., Ltd., on the other hand, values its competiveness of cancer drugs in the global market. Zhongtai predicts that the average growth rate of net profits of Hengrui Medicine in the following three years will reach 28 percent and its target price for Hengrui Medicine stock is 113 yuan per share (17.7 U.S. dollars).

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