PharmaResearch, which had emerged as a KOSDAQ market darling amid the so-called "salmon shot (Rejuran)" craze, gave back a quarter of its market capitalization in a single day.
Fourth-quarter results that missed market expectations (an earnings shock) doused investor sentiment. The securities industry moved to calm nerves, saying it was a temporary phenomenon from changes in accounting treatment, but it was not enough to quell market fear.
On Feb. 5 on the KOSDAQ market, PharmaResearch plunged 23.89% from the previous day to close at 334,500 won. Compared with the record closing high of 711,000 won on Aug. 26 last year, the share price has halved in just over five months.
The trigger for the sell-off was the fourth-quarter results announced the day before. PharmaResearch's fourth-quarter revenue came to 142.8 billion won and operating profit to 51.8 billion won. While up 39% and 54%, respectively, from a year earlier, the figures fell well short of the securities firms' consensus (average estimate). Versus market expectations, revenue was 7.7% lower and operating profit 20.4% lower.
Despite the market shock, the prevailing view inside and outside the company is that the weak results stemmed from an "accounting illusion" and "preemptive investment."
First, the revenue decline largely reflected a change in accounting standards. PharmaResearch shifted from recording "Rejuran authenticity certification" and marketing support as selling, general and administrative expenses to deducting them directly from revenue under a "net recognition" method starting in the fourth quarter. In the process, about 5 billion won, the annual accumulated adjustment for last year, was subtracted at once from fourth-quarter revenue, creating the effect of a smaller top line.
The drop in profitability was due to increased expenses for the future. Research and development (R&D) clinical expenses for expansion into overseas markets such as the United States and Japan, along with one-off costs such as employee bonuses, pushed fourth-quarter selling, general and administrative expenses up by about 10 billion won from the prior quarter.
While acknowledging PharmaResearch's growing pains, the securities industry lowered its sights. Major brokerages cut their target prices in unison, including Samsung Securities (640,000 won → 580,000 won), Kiwoom Securities (700,000 won → 580,000 won) and Daishin Securities (700,000 won → 620,000 won).
Han Song-hyeop, an analyst at Daishin Securities, said, "PharmaResearch's results falling short of expectations are only a temporary phenomenon due to accounting issues and investment expenses; the brand power of Rejuran and the domestic recovery remain intact," adding, "Growth momentum is valid, with initial supply to European partner Vivacy starting."
Kim Chung-hyun, an analyst at Mirae Asset Securities, also said, "The valuation overhang has eased with the sharp share-price drop," and predicted, "This year's profitability, with an operating margin around 40%, will be maintained."
Amid the share-price plunge, the company immediately pulled out a shareholder-return card. PharmaResearch announced it had decided on a cash dividend of 3,700 won per common share, totaling 42.8 billion won. That is up 236% from a year earlier.
A PharmaResearch official said the company would work to enhance shareholder value based on solid cash flow.