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Prudential sells Korean drugmakers after shares almost double

Prudential Plc's South Korean unit is selling the nation's drugmakers after valuations surged to three times more than the benchmark index.

[SEOUL] Prudential Plc's South Korean unit is selling the nation's drugmakers after valuations surged to three times more than the benchmark index.

A gauge of Korean pharmaceutical stocks has rallied 82 per cent this year through Monday, the most among 19 industry groups on the Kospi index, which has gained 9.8 per cent. The measure of medical suppliers trades at 30.7 times estimated earnings, versus 11 times for the broader gauge.

"We've sold our entire holdings in some pharmaceutical companies lately," said Nam Dong Woo, head of equities at Prudential's Eastspring Asset Management Korea Co, which oversees about US$12 billion. "You can't explain current valuations with their earnings. People are buying future stories, which no one can guarantee."

Drugmakers are surging this year after Hanmi Pharm Co sold its treatment for autoimmune diseases to Eli Lilly & Co for as much as US$690 million in March and investors increased bets the nation's aging society will boost profits. The gains come as Korea's traditional exporters in the electronics and automotive industries struggle to compete against the weaker yen and slowing Chinese demand.

Hanmi Pharm has rallied more than four-fold this year and trades at 82.5 times projected 12-month earnings. Samsung Pharmaceutical Co, which is unrelated to the Samsung Group, has surged 663 per cent, the most among stocks on the Kospi medical supplies gauge. Celltrion Inc has climbed 82 per cent on the Kosdaq index of smaller companies after Pfizer Inc bought the Korean company's partner Hospira Inc for about US$17 billion in February.

The Kospi's medical supplies index rose 2.5 per cent on Tuesday. South Korea reported its first deaths from Middle East respiratory syndrome and said there are now two cases of the virus spreading to people who had no contact with the patient considered the source of the local outbreak.

Investors are trying to find the "hidden value" in Korean drugmakers after recent successful deals, said Lee Jin Woo, a Seoul-based money manager at KTB Asset Management Co, which oversees about US$10 billion and holds Hanmi Pharm.

"It's very tough job to project the value of new drugs. The run in the overall sector on this anticipation is too much. I think it's time to focus on taking profits rather than increasing holdings."

The shine is already coming off the biggest gainers. Samsung Pharmaceutical has fallen 17 per cent from its peak on May 20, while Hanmi Pharm tumbled 7.2 per cent last week, the most in almost two months.

Declines will be limited as an aging population locally and globally boost the outlook for the health-care industry, according to Mirae Asset Global Investments Co's Park Taek Young.

Korea will be home to the world's oldest population by 2060, according to Statistics Korea figures, overtaking Japan. By 2095, Koreans will have an average life expectancy of 95.5 years, the highest in the world, data from the United Nations released in 2013 show.

"Korean drugmakers have been increasing their competitiveness," Mr Park, portfolio manager at Mirae Asset's Korean health-care fund, said by phone in Seoul on May 26. "I believe they can be the next stars. There might be corrections in individual stocks but the sector's growth will continue. Amid ample market liquidity in the low-rate era, funds are flocking into this sector globally, not only in Korea."

The Nasdaq Health Care Index has climbed 14 per cent this year, the most among industry groups on the US gauge, which has gained 7.1 per cent. Eagle Pharmaceuticals Inc, this year's best performer on Nasdaq's drugmaker gauge, trades at 26.5 times earnings, about two-thirds cheaper than Hanmi Pharm. All but one stock on the 38-member Korean drugmaker index has gained this year.

While spending is increasing on health-care and some companies are developing new products and technology, share price gains are overdone, Eastspring's Mr Nam said.

"Too big a premium in a low-growth market: it's a bubble," he said. "Bubbles always burst."