Litigation Costs Blunt Margins Improvement
The author is an analyst of NH Investment & Securities. He can be reached at ryan.ra@nhqv.com. -- Ed.
Weighed upon by the booking of large-scale litigation costs, Medytox posted operating losses of W4.6bn for 4Q19. Ongoing litigation costs are to blunt margins improvement until end-1H20. Although adhering to a Buy rating, we lower our TP in reflection of downwards adjustments to our EPS forecasts.
4Q19 review: Records operating losses on large-scale litigation costs
Although maintaining a Buy rating, we lower our TP on Medytox by 6.3% from W480,000 to W450,000, reflecting adjustments to our EPS forecasts in light of rising litigation costs for an ongoing US International Trade Commission (ITC) court case. On a consolidated basis, Medytox posted 4Q19 sales of W58.3bn (+34.2% y-y, +20.4% q-q), but suffered operating losses of W4.6bn (TTL y-y) due to the recording of large-scale litigation costs. As some litigation costs which should have been reflected in 3Q19 were deferred to 4Q19, the firm’s 4Q19 litigation costs ballooned to W16.3bn. Ongoing litigation costs are to blunt margins improvement until end-1H20.
Medytox’s 4Q19 toxin export sales recovered to W19.5bn (+114.3% y-y, +33.6% q-q), and its domestic toxin sales upped to W15.0bn (+22.0% y-y, +21.9% q-q). While both figures proved healthy, we advise trimming back expectations towards 1Q20 earnings as demand for toxins is now slowing due to recent Covid-19 outbreak.
ITC litigation ruling not here yet, but to come soon
On Apr 4, Medytox announced that at the ongoing court trial the ITC Staff Attorney submitted the opinion that a toxin strain used at Daewoong Pharm was the same as one developed by Medytox, a clear suggestion that Daewoong Pharm stole the strain. Medytox noted that Staff Attorney expressed the opinion in a neutral manner, commenting that all of the evidence presented both by the plaintiff and defendant, as well as Staff Attorney’s opinion, are all to be of key importance in the final decision of the court. Meanwhile, Daewoong Pharm is saying that the Staff Attorney’s opinion is merely an opinion of one individual and is not legally binding, and therefore should not determine the court’s final decision.
Apart from the ITC issue, there are still prosecution investigation risks in play for alleged Meditoxin manufacturing and quality data manipulation -- Medytox’s head of production was recently arrested, and the firm’s CEO may come under investigation. Meanwhile, with the ITC scheduled to make an initial ruling in June and a final ruling in October, the outcome of the litigation remains uncertain at this juncture. But, we can confirm that Neuronox now stands first on the NMPA’s permits review list, a development which bodes well for Chinese market permit momentum and accompanying 2H20 earnings improvement.