For stock investors, an audit report means more than a "test answer sheet."
Among them, key audit matters (KAM) are the "pressure points" that accountants mark with a note to "watch this risky part closely." It means areas with significant room for management's subjectivity or uncertainties that can sway the financial statements.
Through the audit reports of three top domestic drugmakers by sales, we examined what "financial time bombs" they are carrying.
① Yuhan: the fate of a 97.6 billion won asset depends on whether it can topple "Tagrisso"
For Yuhan, the global commercialization performance of the lung cancer drug "Leclaza" was identified as the key variable that will determine whether the intangible asset value can be maintained.
Currently, about 97.6 billion won on Yuhan's books is recognized as internally generated development costs for Leclaza. Because internally generated technology has no market price, management's judgment about future cash flows directly affects the asset value. That is why the auditor designated impairment testing of Leclaza as a key audit matter.
An impairment review is an accounting process that checks whether the future economic value of development costs (intangible assets) recorded as an asset has fallen below the carrying amount, leaving only the recoverable amount and recognizing the remainder as a loss (impairment loss).
Leclaza combination therapy has been approved one after another in major markets, starting with the FDA and followed by Europe, Japan, Korea, and China. Of the total $950 million license deal Yuhan signed with Janssen, about $270 million has already flowed in. The auditor appears to have judged that the current book value is reasonable based on these results.
However, whether the book value can be maintained going forward may depend on how quickly prescriptions expand compared with the existing No. 1 therapy, "Tagrisso." Tagrisso is known to currently command more than about 70% of the global market.
Since a rival drug has already preoccupied the market, if prescription growth falls short of expectations, impairment review could resurface.
The tipping point will be the announcement of the overall survival (mOS) results for the Leclaza combination. Lee Ji-won, a Heungkuk Securities analyst, said, "mOS confirmation is expected to be possible in the second half of this year," adding, "A surprise exceeding market expectations may be possible."
② GC Biopharma: will the clinical results for the 43.2 billion won "Curivo" become a "wild card" that shakes net profit?
For GC Biopharma, the key is that changes in the value of the U.S. vaccine developer Curivo are reflected directly in net profit.
Curivo is a vaccine developer that GC Biopharma established in 2018 through a joint investment with U.S.-based vaccine experts. It is currently conducting a phase 2 trial for the shingles vaccine "Amezzosvatein" and, as an unlisted company, has not yet generated revenue.
What drew the auditor's attention was that GC Biopharma's preferred shares convertible into Curivo stock were reclassified during the year from "investments in associates" to "financial assets at fair value through profit or loss." As of the end of the period, it held 43,156 convertible preferred shares.
For this asset, changes in value at the reporting date are recognized immediately in net profit. In other words, even a 1-won change in Curivo's corporate value increases GC Biopharma's profit volatility.
Moreover, Curivo is subject to level 3 fair value measurement, which has no market price. Management's assumptions, such as projected future sales and discount rates, are heavily reflected.
Curivo's fair value on the books was assessed at about 43.2 billion won as of the end of the period.
However, Curivo's value could change depending on the phase 2 results scheduled for announcement in the second half of this year and whether it proceeds to phase 3. GC Biopharma has also signed a contract manufacturing (CMO) deal with Curivo, so the company's success would go beyond investment returns and tie into future plant utilization rates.
Perhaps for this reason, moves to manage the volatility of book figures were also spotted. GC Biopharma disposed of its SAFE (simple agreement for future equity) asset during the period.
A SAFE is a right to secure equity at a relatively low price if corporate value rises in the future. Disposing of it is interpreted as a strategic decision to secure cash now and pursue financial stability, rather than waiting for "upside (additional profit)" from a long-term rise in equity value.
The company said, "Amezzosvatein is being developed with the goal of securing a double-digit market share globally," adding, "Like 'Shingrix,' which currently holds more than 90% of the global market, it is a recombinant protein vaccine that includes an adjuvant, but by applying a next-generation adjuvant, we expect to secure differentiation in terms of tolerability."
③ Chong Kun Dang pharmaceutical: the 88.7 billion won "refund liability" booked in advance faces a fork in the road—reversal vs. confirmation depending on the lawsuit
For Chong Kun Dang pharmaceutical, the size of the refund liability for the cognitive enhancer "Gliatilin (choline alfoscerate formulation)" could increase earnings volatility ahead.
A refund liability is an accounting treatment that recognizes as a liability in advance any amount that may be returned. The refund liability set by Chong Kun Dang pharmaceutical was 88.7 billion won at the end of last year, up 36.5 billion won in one year.
In 2020, the Ministry of Health and Welfare shifted certain indications of choline alfoscerate formulations to selective benefits and required drugmakers to sign reimbursement contracts that would claw back part of prescription amounts in the event of clinical failure. The drugmakers later agreed that if reevaluation trials failed and indications were deleted, they would return 20% of prescription amounts for a certain period to the National Health Insurance Service.
Drugmakers have filed a lawsuit seeking confirmation of invalidity, arguing that the clawback agreement was effectively forced and violated the principle of statutory reservation. They lost in the first trial last year and are now in the appeals process.
Depending on the appeals ruling, the 88.7 billion won could be finalized as an actual expenditure, or part of it could be reversed into profit. Depending on the timing, it could also become a factor that increases short-term earnings volatility.
Gliatilin still accounts for about 11.5% of Chong Kun Dang pharmaceutical's prescriptions, making it a key item. However, prescription volume has been declining since the shift to selective benefits. Last year's prescription amount was 111.2 billion won, down 10.1 billion won, or about 8.3%, from 121.3 billion won in 2024.
Kim Beom-jun, a professor of accounting at the Catholic University, said, "Under Korea International Financial Reporting Standards (K-IFRS) No. 1037, losses related to litigation must be recognized as a provision even before a ruling is finalized if a present obligation exists, an outflow of resources is probable, and the loss amount can be reasonably estimated."
He explained, "Once the ruling is finalized, the amount is adjusted by recognizing additional losses or reversing them to match the final loss amount. The amount is reflected as a liability on the statement of financial position and as an expense on the statement of comprehensive income."