HK inno.N (195940.KS) is expected to post third-quarter results below market expectations as inventory adjustments for its gastroesophageal reflux disease treatment K-CAB and lower royalties from China weigh on earnings, according to a brokerage report. Domestic prescriptions are growing, but expanding overseas sales and securing a European licensing deal are needed to improve profitability, the report said.
Shinyoung Securities said in a report on the 16th that it estimates HK inno.N's third-quarter revenue at 268.3 billion won, up 2.9% from a year earlier, and operating profit at 25.5 billion won, down 1.5%. The figures are 2.3% and 18.3% below market consensus, respectively. The brokerage maintained its buy rating but cut its target price to 59,000 won from 68,000 won. That implies 69.5% upside from the previous day's close of 34,800 won.
Analysts say rising prescriptions for K-CAB are not translating directly into revenue growth. "K-CAB prescriptions reached 65.4 billion won in the third quarter, continuing their growth trend, but revenue will likely stay at or below the 47.7 billion won level of the same period last year because shipments declined as inventory levels were adjusted," said Jung Yu-kyung, an analyst at Shinyoung Securities. A gap is emerging between prescription figures and revenue booked from the company's product shipments.
Royalties from China may also fall short of earlier forecasts. "We initially expected about 5 billion won in royalties in the third quarter, but sales were weak in July and August because of the Chinese government's anti-corruption campaign in the medical sector, making even 4 billion won difficult to achieve," Jung said.
Losses in the health and beauty division are another burden. With advertising and promotional spending continuing for its hangover relief drink Condition, combined with weak growth in other beverages and a slump in the beauty business, the brokerage expects an operating loss of about 1.5 billion won, similar to the previous quarter. "Because changing drinking culture makes it hard for Condition sales to recover to past levels at year-end, restructuring of the beauty division is also needed," Jung said.
Still, the brokerage said K-CAB is holding its competitive position in the domestic market. Despite growth by rival products such as Jaqbo and Fexuclue, it has consistently recorded monthly prescriptions in the 20 billion won range. "This is a point where expanding K-CAB's overseas sales and licensing is essential for steady revenue growth in the prescription drug division," Jung said. Drugs licensed in from outside carry lower margins than in-house products, making K-CAB's growth critical.
Against that backdrop, K-CAB's U.S. approval, expected in the first half of next year, along with a European licensing agreement and additional in-licensing of prescription drugs, are seen as potential catalysts for a share price rebound.
