Park Jae-hyuk is a seasoned journalist who has provided comprehensive coverage of South Korea's corporate dynamics, economic policies, industry challenges and the global positioning of Korean companies. Based on the articles he has written since joining The Korea Times in 2016, his investigative approach has helped readers understand corporate governance, economic trends and business strategies shaping South Korea’s economy.
Are Korean drug makers overvalued?
By Park Jae-hyuk
A plunge in Hanmi Pharmaceutical shares this week has caused another “price bubble” controversy with domestic pharmaceuticals and biotech companies.
A day before the beginning of the Lunar New Year holiday last week, Hanmi Pharmaceutical announced it had stopped testing HM71224, which was initially expected to be exported to Eli Lilly and Company, a U.S.-based global pharmaceutical company.
After the four-day holiday, its shares dropped by 8.5 percent from 541,000 won to 495,000 won. This was the first time Hanmi Pharmaceutical shares have fallen below 500,000 won since last November.
Although the shares slightly rebounded Tuesday, it ended at 486,000 won Friday.
The announcement also led brokerages to lower the target stock prices of Hanmi Pharmaceutical.
Since then, some observers pointed out Korean pharmaceuticals are overvalued, saying they lack any specific achievements in R&D and performance. In Korea, individual investors have suffered from the instability of the stock prices of pharmaceutical and biotech firms.
Given that it is hard to measure the value of experimental technologies, observers regard the boom of drug companies as a bubble. They even worry the recent unfavorable factor of Hanmi Pharmaceutical may negatively affect the overall industry.
The Korea Exchange’s latest data support their opinions.
According to the securities exchange operator, healthcare stocks in this country have been deemed the most overvalued, because the price-to-earnings ratio (PER) of the healthcare sector was the highest among major sectors at an average of 91.78 as of the end of December last year.
The ratio measures a company’s current share price relative to its earnings. A company with a higher PER than the average suggests the stock may be overvalued.
For example, Celltrion’s market capitalization reached 38 trillion won ($35 billion), but it only posted 517.3 billion won in operating profit last year. On the contrary, Hyundai Motor with a 34 trillion won market capitalization posted 4.57 trillion won in operating profit last year.
Korean drug makers’ PER also exceeded such global pharmaceuticals as Johnson & Johnson, Pfizer and Merck.
Earlier this year, the KOSDAQ’s No. 3 biotech company SillaJen was also embroiled in controversy, after its largest shareholders offloaded significant portions of their shares. Its stock price fluctuated at that time, while questions rose whether its price was a bubble or not.
However, analysts still maintain their positive views on domestic drug makers, saying the case of Hanmi Pharmaceutical will have limited impact on other companies.
“Investors have already realized the suspension of clinical trials during the development of the new drug is not surprising,” Mirae Asset Daewoo analyst Kim Tae-hee said.
HI Investment & Securities analyst Huh Hye-min also said Korean investors have enough previous experience regarding the halt in clinical tests.
As they said, individual investors intensively bought Hanmi Pharmaceutical shares later in the week.
According to the Korea Exchange, their purchase amounted to 43.5 billion won a day after the steep decrease, while foreigners and institutions sold Hanmi Pharmaceutical shares worth 44.8 billion won.