One of the World's Hottest Stocks Is Tumbling in South Korea

(Bloomberg) -- Celltrion Inc., the little-known South Korean biotech company that surged into the ranks of the world’s most-traded stocks at the start of 2018, may finally be coming down to Earth.

After climbing 185 percent over the past year on volume that topped that of Tesla Inc. and Citigroup Inc. at one point this month, Celltrion abruptly reversed course last week. By Monday’s close, it was down 20 percent from a Jan. 15 peak, buffeted by disappointing fourth-quarter earnings and a research report from Deutsche Bank AG that criticized the company’s accounting.

If the Celltrion skeptics are right, the stock could have a lot further to drop. Several institutional money managers in Seoul have called the past year’s rally unjustified, a product of excessive speculation among Korea’s mom-and-pop investors. Even after its slump, the shares are valued at about 100 times earnings, versus 13 for the benchmark Kospi index. Deutsche Bank, which took issue with the way Celltrion capitalized its research spending in a Jan. 18 note, said the stock could fall 70 percent.

“I see housewives are talking about Celltrion -- which is a clear signal of bubble in a stock,” said Jung Sung-Han, senior fund manager at Shinhan BNP Paribas Asset Management Co. in Seoul.

A Celltrion representative declined to comment on the recent stock moves, but the company refuted the Deustche Bank note, saying it was “distorted analysis” to compare a biosimilar makers’ accounting with that of global pharmaceutical companies.

Incheon-based Celltrion had benefited from a number of factors that created a perfect storm of interest. The expected approval next month by the U.S. Food and Drug Administration of its Truxima drug, a biosimilar to Roche’s lymphoma drug Rituxan, would give it access to a $3.9 billion market, according to an analysis by Bloomberg Intelligence. And the company said earlier this month that it will triple the capacity of a new plant, due to begin construction in the second half of the year.

Broader market changes also helped. Celltrion will probably be joining Korea’s large-cap index in the next few months, a step that often fuels buying. Adding to the bullish case was a push by the Korean government to increase buying of the country’s small-caps, especially by the nation’s pension funds.

The gains were also propelled by a short squeeze, according to Lee Seung-Hoon, head of equities at DB Asset Management Co. Wagers against the company have shrunk to an estimated 4.8 percent of shares outstanding from more than 9 percent in November, according to data from IHS Markit Ltd.

Bubble Bursting

Celltrion fell 9.9 percent on Friday after its fourth-quarter revenue and earnings missed estimates, according to Kevin Jin, analyst at Korea Investment & Securities. Volume remained high, with roughly $1 billion worth of shares changing hands, about the same as the value of trading in companies such as AT&T Inc. and Wells Fargo & Co., according to data compiled by Bloomberg.

The stock may face further selling pressure around its expected move to the Kospi, said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd. Meanwhile, Nomura Securities Co. analyst Cara Song said in a Jan. 16 note that investors should sell, highlighting its expensive valuation.

“Everyone agrees it has rallied too much,” said DB Asset Management’s Lee.

©2018 Bloomberg L.P.

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