As Korea Ages, Drug Firms Look More Vital

By Kim Kyoungwha

Shares of South Korean drug makers like Dong-A Pharmaceutical and Choongwae Pharma may rebound to surpass records set last year as demand rises among the world’s most rapidly aging population.

The 37-member Korea Medicine index has fallen 9.6 percent from its all-time high Dec. 1 as a decline in drug prices prompted some investors to sell. One fund manager, Jung Kyun Sik, said the drop was an opportunity to buy the shares because sales to retirees and profits from new drugs would bolster earnings this year.

"The industry outlook is good against the backdrop of an aging society," said Jung, an investor at Shinhan BNP Paribas Investment Trust Management in Seoul. "I will keep adding large pharmaceutical stocks to my portfolios this year." Shinhan BNP manages shares in companies like Chong Kun Dang Pharmaceutical and Choongwae. South Korea in 2004 overtook Japan as the world’s fastest-aging society, according to data from the National Statistical Office.

Koreans are spending more on pharmaceuticals as the economy expands and personal wealth increases. The nation’s drug market will grow 38 percent to 9.5 trillion won, or $9.7 billion, by 2010, according to Samsung Securities in Seoul.

"There is a structural change in demographics, a good omen for pharmaceutical makers," said Hwang Ho Sung, an analyst at Woori Investment & Securities in Seoul. "Medical firms will be the chief beneficiary of the trend." Dong-A, which makes the erectile- dysfunction drug Zydena, and Chong Kun Dang, which sells Dilatren for high blood pressure, are his top picks.

A rebound could enable drug stocks to reproduce gains from last year. Gains in 2005 were driven by earnings. Last year, the Kospi Medicine index rose 118 percent, making it one of the top performers among 19 industry groups.

The 700-member Kospi jumped 54 percent to become Asia’s best performer last year. The MSCI World Health Care index rose 7.6 percent in 2005.

Shares of Chong Kun Dang and Yungjin Pharmaceutical rose more than fourfold last year, while Dong-A shares more than tripled. Shares of Ilyang Pharmaceutical did the best, rising almost ninefold.

This year, Asian health-care stocks are beating U.S. and European counterparts. In Indonesia, Kalbe Farma jumped 41 percent, the biggest gain for drug stocks in MSCI’s Asia-Pacific index. Tanabe Seiyaku gained 17 percent amid speculation that the Japanese company could be a takeover target.

The number of South Koreans who are at least 65 years old will jump to 24 percent of the population in 2030, compared with 9 percent in 2005, the National Statistical Office estimates.

"Medical spending for people 65 and over is rising fast," said Han Sang Hwa, a Tong Yang Investment Bank analyst in Seoul. "Interest in healthy lifestyles among the populace is growing," Han added. "In addition, with income levels rising, the market for drugs used to treat chronic illnesses is surging." The government’s goal of providing universal health coverage is fueling demand for pharmaceuticals, said Cho Euna, an analyst at Samsung Securities in Seoul.

The Ministry of Health and Welfare is expanding the list of medical services paid by the government, with the coverage rate for catastrophic diseases scheduled to rise to 75 percent by 2007 from 47 percent. The ministry cut drug prices an average of 10.8 percent in February.

By Kim Kyoungwha