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Swinging to profitability

Initiate coverage with Buy and TP of W86,000

We initiate our coverage of LigaChem Biosciences (LigaChem) with a Buy rating and target price of W86,000 (35.6% upside). Our target price is based on our 2024-30 estimates (three new drugs expected to be released by 2030) and a discounted cash flow (DCF) model with a weighted average cost of capital (WACC) of 8.2% and perpetual growth rate of 1%. Among biotech stocks, we believe LigaChem stands out for its undemanding valuation (2025F P/E of 14.6x) and profitability. In contrast, Daiichi Sankyo, the co-developer of Enhertu, is trading at a 2025F P/E of 34x, while Seagen and ImmunoGen were reporting operating losses before their acquisitions despite having commercialized items in their product portfolios.

Investment points

1) Growing platform value: Following its 2015 licensing agreement with China’s Fosun Pharma for its HER2-targeting antibody-drug conjugate (ADC), the company has entered into a total of 10 licensing agreements for its ADC platform and drug candidates. This strong performance is attributable to its proprietary drug-linker and payload technologies (essential to ADC drugs). The value of technology transfer deals has also increased over time, from W151.6bn in 2019 (Takeda) to W321bn in 2022 (Amgen).

2) Ability to finance clinical trials: In January, the company announced a third-party allotment of new shares and the sale of existing shares. Following the completion of these deals, Pan Orion became the largest shareholder with a 25.73% stake (W548.5bn invested). We believe the additional funding has helped ease the cost burden associated with clinical trials, giving LigaChem sufficient resources to finance the development of four to five drug candidates annually and secure a pipeline of 10 clinical trials within the next five years.

3) LCB14 nearing commercialization: In 2H24, we expect the company to submit a conditional approval application for LCB14 (HER2-targeting ADC). In China, approval applications for anti-cancer drugs used as third-line treatments can be submitted after the completion of phase 1 trials. As such, we believe an approval application for LCB14 could be submitted as early as the end of this year. If approved, LCB14 would likely hit the market in 2025, becoming the firm’s first commercialized item. As a lack of commercialized items has been a factor weighing on valuation, we believe the commercialization of LCB14 would allow the stock to garner a valuation on par with Seagen and ImmunoGen (acquired by major companies in 2023).