Clouds are gathering over the earnings and stock outlook of Daewon Pharmaceutical, the No. 1 company by market share in Korea's cough and phlegm medicine (antitussive and expectorant) market. The slowdown in growth of core products and restructuring at a subsidiary are overlapping factors.
Pelubi, the anti-inflammatory analgesic that drove the company's growth, lost a patent dispute and now faces generic competition, and SD Biotechnologies, a subsidiary acquired for business diversification, is on the verge of delisting.
Daewon Pharmaceutical traces its roots to Taeguk Yakpum, founded in Busan in 1956 by the late founder Baek Bu-hyeon, with the corporate name changed in 1964. After brothers Chair Baek Seung-ho and Vice Chair Baek Seung-yeol ran the company together, President Baek In-hwan, Baek's eldest son, became CEO in 2024, shifting to a third-generation management system.
◇ Earnings slowdown and litigation risk
On the 28th, Kiwoom Securities lowered its target price on Daewon Pharmaceutical to 15,000 won from 17,000 won, saying, "Companywide profit and loss are a concern due to a transitional phase in subsidiary performance."
On a consolidation basis, Daewon Pharmaceutical's sales for the first to third quarters of last year were 445.6 billion won, down 25.5% from a year earlier. Operating profit swung to a loss, posting a 2.37 billion won deficit. Depending on the yet-to-be-announced fourth-quarter results, the company's full-year results last year could tip between profit and loss.
According to Kiwoom Securities, Daewon Pharmaceutical's fourth-quarter sales last year are estimated at 149.9 billion won, up 3.3% on-year, with operating profit turning to a loss of 2.3 billion won. Looking at Daewon Pharmaceutical's net profit on a consolidation basis, it declined to 23.463 billion won in 2023 and 9.045 billion won in 2024.
This is seen as the result of slower growth in sales of key medicines compared with previous years. Representative examples include the cold medicines Coldaewon (over-the-counter) and Codaewon (prescription), and the anti-inflammatory analgesic Pelubi (prescription).
Coldaewon and Codaewon saw sales surge during the COVID-19 pandemic, but their steep high-growth trajectory broke after the pandemic phase shifted.
Pelubi, with annual prescription performance exceeding 60 billion won, faces generic competition. Pelubi is a new drug developed by Daewon Pharmaceutical to improve side effects of nonsteroidal anti-inflammatory analgesics and is a major contributor to company sales.
As several latecomer drugmakers moved to circumvent Pelubi's patents, Daewon Pharmaceutical filed lawsuits, leading to ongoing legal disputes. In patent-avoidance suits brought by generic companies, Daewon Pharmaceutical lost in the first and second trials and at the Supreme Court, effectively ending the Pelubi-related patent disputes.
Separately from the patent suits, Daewon Pharmaceutical is pursuing an administrative lawsuit against the Ministry of Health and Welfare over the legality of an order to cut Pelubi's drug price. After the government decided to reduce Pelubi's price by 30% in line with the launch of generics, Daewon Pharmaceutical filed an administrative suit in 2021 and is currently awaiting a Supreme Court ruling. Although the government won up to the appellate court, Daewon Pharmaceutical appealed to the Supreme Court, and a stay of execution was granted, deferring the price cut.
In the industry, some noted that if the price cut is applied, an annual sales decline in the hundreds of billions of won would be unavoidable, explaining why Daewon Pharmaceutical is going all out.
◇ Subsidiary risks loom amid shift to third-generation leadership
From Jan. 2024, the company shifted to a co-CEO system led by Vice Chair Baek Seung-yeol and his nephew, President Baek In-hwan. In Nov. last year, Executive Managing Director Baek In-young, the eldest son of Vice Chair Baek Seung-yeol and head of Daewon Pharmaceutical's Healthcare Business Division, was appointed the new CEO of subsidiary SD Biotechnologies. This created a structure in which cousins run the parent and subsidiary. Baek In-hwan of Daewon Pharmaceutical was born in 1984, and Baek In-young of SD Biotechnologies was born in 1989.
Daewon Pharmaceutical's largest shareholder is Vice Chair Baek Seung-yeol with an 11.94% stake (based on voting shares), followed by Chair Baek Seung-ho with 10.14%. While the founding family's stake is a stable roughly 39%, CEO Baek In-hwan holds 6.11% and Executive Managing Director Baek In-young holds 3.08%, leaving equity succession tasks ahead.
The most pressing issue is "normalizing the subsidiaries." The health supplements subsidiary Daewon Healthcare is showing a trend of performance improvement, but SD Biotechnologies, a cosmetics company acquired and consolidated as a subsidiary in 2023 for business diversification, has yet to deliver results.
SD Biotechnologies reduced its operating loss to 9.2 billion won in 2024, narrowing the deficit by 32.8% from a year earlier. While deep restructuring is reducing losses, SD Biotechnologies' results are reflected in Daewon Pharmaceutical's consolidation earnings and are affecting the stock outlook. The cumulative operating loss for SD Biotechnologies in the first to third quarters last year was about 4.2 billion won.
On top of that, SD Biotechnologies stands at a crossroads of delisting. In Sept. last year, the Korea Exchange (KRX) granted SD Biotechnologies an improvement period of about 11 months after deliberation. Accordingly, by Aug. this year, it must demonstrate performance improvement, including achieving operating profit. In this context, Executive Managing Director Baek In-young was appointed CEO of SD Biotechnologies, adding to Baek's burden.
Shin Min-su, an analyst at Kiwoom Securities, said, "For Daewon Pharmaceutical's companywide income statement figures and a stock rebound, improving the performance of key subsidiaries is the top priority."