Lex Letter from Seoul: Omicron variant gives Asian pharma a chance to catch up

Dear readers,

Western pharma groups such as Pfizer and Moderna have made big profits and won even greater prestige from developing Covid-19 vaccines. The breakthroughs have also brought windfalls for local vaccine production partners and distributors in Asia.

The stocks of companies such as South Korean biopharmaceutical group SK Bioscience have hit record highs this year. But an unwinding of more than a year’s worth of bets on the sector is now on the cards.

Shares in SK Bioscience have gained the most of any business that listed globally which raised more than $1bn this year, according to Bloomberg data. The stock has more than doubled following its March listing, when it raised $1.3bn.

Japan’s drug group Takeda Pharmaceutical, which has the local rights to distribute Moderna and Novavax vaccines, have been another beneficiary. Shares gained 50 per cent in a rally that lasted 12 months from March last year. Hopes that it may create a successful Covid vaccine of its own further fuelled the rise.

In Japan, it has not just been pharmaceutical companies that have jumped in. A photographic film maker and machinery companies have been among those that have tried to produce Covid treatments and vaccines to revive flagging growth.

Bulls hope that Avigan, an influenza drug developed by the chemical business of Fujifilm, may one day become a Covid treatment. That fuelled a rally starting in March 2020. Shares have since doubled. Others that have joined the race include clinical trials business I’rom Group.

But the companies today have little to show for more than a year’s worth of investment, suggesting investor optimism was overblown. Shares in Takeda, for example, at one point surpassed 50 times forward earnings. That represented a premium double that of the vaccine makers themselves, AstraZeneca included.

Sustained gains are contingent on the production companies and distributors continuing to produce and handle millions of doses. SK Bioscience’s August peak in its stock coincided with its shipment high water mark of 1m doses. Its shares are at present trading at a reasonable 24 times forward earnings, but that is partly thanks to highly optimistic sales expectations. On a trailing basis, that goes up to more than 90 times.

Vaccination programmes in Asia are maturing. Rates of fully vaccinated people have surpassed 80 per cent for countries such as South Korea. Reports suggest the Omicron coronavirus variant may result in relatively mild Covid cases, which may mean a lower level of urgency for booster shots.

Still, for some companies, especially the ones that failed to secure market share last year, the Omicron variant offers a second chance to reap profits from vaccines. Some experts believe the new strain may be highly infectious and less responsive to existing vaccines compared with earlier strains.

Chinese vaccine maker Shenzhen Kangtai Biological Products is one of the hopefuls. Shares of the Chinese partner of AstraZeneca are down more than a third this year. Local vaccine makers such as Sinopharm and Sinovac made the main jabs for China’s population of 1.4bn. Sinovac has started research on an Omicron-related vaccine.

Local peer Shanghai Fosun Pharmaceutical will work with German partner BioNTech to develop a new Omicron variant vaccine of its own. Japanese groups Shionogi and Daiichi Sankyo, which are developing Covid vaccines, are shifting research towards the new variant.

For now, Chinese companies have an edge over regional competitors. China is yet to approve foreign Covid vaccines, which leaves the market wide open to local pharma groups. In other parts of Asia, vaccine makers have a three-to-four-month window to develop updated vaccines with the hope that Omicron has given them an opportunity to close the gap with western rivals.

June Yoon
Lex writer