The ongoing strength of the U.S. dollar will likely result in mixed fortunes for Korean biopharmaceutical and biotech companies in the second quarter, according to industry analysts on Wednesday.

The ongoing strength of the U.S. dollar against the Korean won will lead to mixed performances among Korean pharmaceutical companies in the second quarter.
The ongoing strength of the U.S. dollar against the Korean won will lead to mixed performances among Korean pharmaceutical companies in the second quarter.

According to the Korea International Trade Association, the Korean currency ended Wednesday’s trading at 1,311.50 won per U.S. dollar. Financial market watchers expect the Korean won will continue to slide against the greenback due to the U.S. interest rate hike, which also pulls down the Chinese yuan, Japanese yen, and Euro.

A local analyst noted that companies with a higher share of the imports of raw materials would see their earnings drop due to higher logistics costs. In contrast, the contract development and manufacturing organization (CDMO) service providers will experience increases in earnings through their contracts with foreign clients who settle with the dollar.

“If a company is highly dependent on raw material imports, it is inevitably sensitive to exchange rate fluctuations, international commodity prices, and shipping costs,” said Lee Jun-soo, an analyst for Prophet Asset Management, to Korea Biomedical Review. “While companies that bought raw materials at low prices before the inflation may be able to survive, those which have to buy and sell raw materials at the current rate will suffer.”

Lee explained that medical diagnostic companies would likely suffer more damage than other pharmaceutical companies as the former are more dependent on imports.

“A company that makes everything from ingredients to finished products in-house will be able to withstand the current inflation,” Lee said. “However, most Korean diagnostic companies import major raw materials, such as nucleic acid extraction reagents, from abroad and assemble them into finished products.”

Lee pointed out that these companies must purchase next-generation sequencing equipment from abroad. And with the recent rise in labor costs, the profitability of Korean diagnostic companies will drop significantly during the ongoing inflation.

FnGuide, a Seoul-based financial data tracker, made similar forecasts to Lee’s concerning the healthcare industry’s earnings in the second quarter.

According to the company’s report based on securities companies’ analyses, SD Biosensor is likely to record sales of 745.9 billion won ($568.3 million), and an operating profit of 306.9 billion won in the second quarter, down 4.42 percent and 21.38 percent, respectively, from the same period of last year.

Seegene is also expected to record sales of 234 billion won and operating profit of 97 billion won, down 23 percent and 32.7 percent from a year earlier.

“The FnGuide report shows that the operating profits of SD Biosensor and Seegene declined more sharply than their sales,” Lee said. “Such a steeper decrease in operating profit than sales is due to the rise in selling, general, and administrative (SG&A) expenses.”

Lee also advised caution against investing in companies that rely heavily on imports of raw materials.

“Investors need to be careful in investing in companies that rely heavily on imports for raw materials. Because, once the currency exchange stabilizes, these companies will have to sell their product at far lower prices than their production costs,” Lee said. “That can be more painful for small- and medium-sized enterprises than for large enterprises.”

In contrast, Korean companies engaged in the CDMO business will benefit from the strong dollar.

“This is because the cost of raw and subsidiary materials for CDMO companies is paid by the contractor, meaning that there is less risk of exchange rate fluctuations,” Lee said. “If the contractor pays the contract fee in dollars, the dollar’s strength will be advantageous for those companies.”

Lee also stressed that biopharmaceutical companies that have signed a technology export contract might also welcome the strong dollar. “This is because a strong dollar will likely lead to increases in milestones and royalties the company can receive.”

Lee cited ABL Bio as an example.

ABL Bio recently announced that it received the first milestone payment of $6 million from Compass Therapeutics for achieving the first results for its dual antibody anticancer drug ABL001 on June 27. The company licensed out the drug to Compass Therapeutics on Nov. 30, 2018.

“Considering that the exchange rates on June 27, 2022, and Nov. 30, 2018, are 1,299.4 won 1,121.2 won per dollar, the company’s profit will increase by more than 1 billion won thanks to the strong greenback,” Lee said.

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