Alteogen shares plunged more than 20% in a day, reigniting debate in Korea's pharma-bio market over how to assess the value of new drugs.
Alteogen ended trading on the 21st at 373,500 won, down 22.35% from the previous trading day. Its market capitalization fell below 20 trillion won as about 5.7 trillion won evaporated in a day.
It was largely because royalties that Alteogen would receive from the subcutaneous (SC) formulation of Merck's immuno-oncology drug "Keytruda," if sales occur, were confirmed to be lower than expected. According to MSD's third-quarter report last year, Alteogen's royalty payment terms are "2% of net sales." Considering that global competitor Halozyme's royalties for SC formulation-switch technology are typically in the 3%–7% range, the rate is low.
On top of that, disappointment grew as the size of the recently disclosed technology transfer deal with Tesaro, a subsidiary of GSK, also fell short of investor expectations. The total size of the deal is 420 billion won. The market had anticipated a deal on the scale of the previous 1.9 trillion won agreement with AstraZeneca, based on CEO Jeon Tae-yeon of Alteogen saying, "The imminent technology transfer deal is similar in size to the existing contract."
◇ Why are "hundreds of billions won deals" treated like new drug value?
Behind the sharp, short-term share price swing over individual deal terms is a structural problem: Korea's pharma-bio market still relies excessively on the "total contract amount" when valuing new drugs.
In domestic out-licensing deals, the disclosed total contract amount is calculated as the maximum sum, adding upfront payments to milestones paid by clinical, approval, and commercialization stages, plus royalties tied to long-term sales.
But this figure is often interpreted as the present value of a new drug as soon as the contract is signed and reflected in the share price.
The deal between Alteogen and Tesaro has the same structure. Of the 420 billion won total contract amount, 390.5 billion won, or about 93%, consists of milestones.
The actual cash inflow at the time of signing is limited to an upfront payment of 29.5 billion won. The rest will materialize only if it passes multiple gates, namely clinical success and commercialization, and royalties also have meaning only after actual sales occur.
By nature, milestones are "conditional value." If a program fails to clear late-stage trials or the approval threshold, they are not paid, and there are many cases in which technology is returned due to a partner's strategy shifts or reprioritization.
When Italy's Chiesi notified the return of rights to the respiratory therapy candidate "NCE401" last year, the actual amount received by TiumBio was only 2.1 billion won out of the 109.9 billion won total contract amount.
◇ Milestones and royalties are assumptions about the future
This deal structure is also how the global pharma industry reflects the uncertainty of new drug development. From discovery through phase 1–3 trials and regulatory approval, new drug development typically takes 10–15 years, and dropouts are common at intermediate stages. That risk is split into milestones and royalties.
Under Korea's accounting standards as well, much of new drug value rests on "assumptions." Even for in-house development, a new drug is generally recognized as an intangible asset only from phase 3, and a biosimilar from phase 1, if certain conditions are met.
If later clinical results are negative or business feasibility is deemed low, the amount is converted into an impairment loss and expensed immediately. This means a new drug value assessed in the early stages of development can disappear from the financial statements right away as assumptions change.
Kim Beom-jun, an accounting professor at Catholic University, said, "The success probability and value of a technology transfer deal vary greatly depending on the stage at which a candidate is contracted," adding, "The earlier the stage, the more often what actually accrues to the company is limited to the upfront payment."
He continued, "Milestones and royalties are numbers stacked on the assumption that new drug value will be realized in the future," and noted, "It is risky to accept them as present value when clinical and regulatory gates have not yet been cleared."
Analysts say expectations surrounding Alteogen's MSD deal had also been largely priced into the stock. Brokerages had estimated Alteogen's royalty rate at about 5% and projected that if Keytruda's SC formulation replaces half of the existing market, the company would receive more than 1 trillion won in royalties over time.
◇ It's too early for champagne … "Investors' perspective must change"
Experts stress that, with the Alteogen case, investors also need to change how they view out-licensing.
Kim said, "We keep popping champagne before the grapes are even ripe," and added, "No matter how big a deal looks, if the money that actually entered the company's pocket still carries contractual obligations to be fulfilled, it should be accounted for not as revenue but as deferred revenue." Deferred revenue is classified as a liability on the books because the money was received before the conditions for revenue recognition were met.
Park Dong-heum, a certified public accountant at EnterValue, said, "In a technology transfer deal, revenue is recognized as conditions are met, so there is no accounting issue," but added, "We should be wary of the practice in which a yet-unrealized total contract amount is taken as a definitive signal of new drug value and priced into shares early."
He added, "There have always been cases where development stops mid-trial, and it is rare to see programs make it all the way to final approval by the U.S. Food and Drug Administration (FDA)," noting, "Today's sharp drop in Alteogen shares does not look structurally much different from the early phase of the Hanmi Pharmaceutical episode 10 years ago, when out-licensing expectations were priced into shares."
An executive at a pharma-bio company with out-licensing experience also said, "In the industry, upfront payments and near-term milestones matter more than the total contract amount," adding, "Whether there is a track record of actually receiving milestones in the past is also an important criterion in judging the deal's real value."