[Into the Stocks] Hwanin Pharm's Surprise Earnings Amid 'Corona Blue'... When Will the New Drug Jackpot Come?

Hwanin Pharmaceutical, a Specialist in Psychiatric Treatments
Over 80% of Sales from Neuropsychiatric Drugs Including Depression Treatments
R&D Expenses 9.3% of Sales Last Year
Early Stage of New Drug Development

[Asia Economy Reporter Ji Yeon-jin] Infectious diseases have driven pharmaceutical companies' valuations sky-high. Last year, amid the COVID-19 pandemic, the stock prices of domestic listed pharmaceutical companies, reflecting expectations for infectious disease treatments and vaccine development, soared. There were exceptions. Pharmaceutical companies without direct COVID-19-related benefits were pushed out of investors' focus, with Hwanin Pharm being a representative example.

◆ Beneficiary of 'Corona Blue'... Quietly Strong = Hwanin Pharm, established in 1978, is the leading domestic company specializing in neuropsychiatric pharmaceuticals. Over 80% of its products are neuropsychiatric drugs, with representative products including schizophrenia treatments (Quetiapine, Risperidone), neuropsychiatric stabilizers (Alpram), and dementia symptom treatments (Hwanin Donepezil).

Last year, on a consolidated basis, sales reached 171.7 billion KRW, and operating profit was 28.4 billion KRW, increasing by 7.92% and 8.81% respectively compared to the previous year. Considering that sales were in the 150 billion KRW range in 2018 and 2019, this marks the steepest growth rate in the past three years. Particularly, in Q4 of last year, sales surged by 14.5% to 44.2 billion KRW and operating profit soared by 75.5% to 7.2 billion KRW. This was due to increased prescriptions of depression treatments as the so-called 'Corona Blue'?depression caused by prolonged COVID-19?spread. In fact, sales of neuropsychiatric disorder treatments jumped by over 10 billion KRW from 130 billion KRW (81.71% of sales) in 2019 to 141.9 billion KRW (82.84%) last year.

The market expects Hwanin Pharm, which holds the number one market share, to be the biggest beneficiary as the government announced in January a 5-year investment of 2 trillion KRW in mental health to overcome COVID-19 and promote nationwide mental health. The government aims to increase mental health service utilization from 22.5% to 30% by 2025. Since psychiatric treatment has been avoided domestically until now, improved awareness means the psychiatric drug market size will also expand.

Jeong Heung-sik, a researcher at Ebest Investment & Securities, set Hwanin Pharm's target stock price at 22,000 KRW in January this year and raised it to 24,000 KRW on February 9, just a month later. Hwanin Pharm's stock closed at 18,100 KRW on the 30th, 9.37% higher than the beginning of the year. The stock showed an upward trend following the government's mental health investment policy but has stalled this month.

◆ Increase in R&D Expenses, Will It Lead to New Drug Development? = Generally, the biggest factor moving the stock price of ethical pharmaceutical (ETC) companies is their new drug pipeline. According to Hwanin Pharm's 2020 business report recently submitted, the company's consolidated R&D expenses last year were 15.9 billion KRW, accounting for 9.31% of total sales. R&D expenses have steadily increased annually, with 10.9 billion KRW (7.1%) in 2018 and 13.2 billion KRW (8.3%) in 2019.

New drug development is still in the early stages. The current pipeline focuses on neuropsychiatric treatments such as dementia, Alzheimer's, and Parkinson's disease. The improved dementia drug (WIP-RVX14) is in the candidate substance development stage with overseas development ongoing, and the Alzheimer's drug (WIF-1905) is searching for candidate substances with technology transfer under consideration, according to the company. The domestic market size for Alzheimer's treatments is 215.5 billion KRW. Last year, development also began for Parkinson's, anticancer, antithrombotic, and depression treatments.

The company has experienced several setbacks. The dementia drug's animal testing was completed in December last year but research was halted due to lack of efficacy, and another dementia treatment research was discontinued in October 2019.

Generics have been developed and launched for epilepsy, schizophrenia, Parkinson's, and depression treatments, with Parkinson's treatment already approved. Researcher Jeong said, "Due to the nature of psychiatric drugs, demand for Alzheimer's and depression treatments is continuously increasing, showing a mid- to long-term growth trend in sales. This year, profitability is expected to improve as the proportion of in-house generics in psychiatric drugs expands (reducing product mix)."

Kim Young-jun, a researcher at KTB Investment & Securities, predicted, "Although profitability stagnated as R&D expanded since 2015, this year, considering the already increased R&D ratio, operating profit growth due to external growth is possible."