[Edaily Reporter KIM SAE-MI ] PharmaResearch(214450)is accelerating its mergers and acquisitions (M&A) and overseas business expansion, building on its strong earnings growth. However, as losses have accumulated from some past acquisitions and investment assets, the burden is growing on Jeong Rae-seung, an executive director at PharmaResearch who oversees investment strategy.

According to the Financial Supervisory Service’s electronic disclosure system on the 24th, Medicoson—a medical device company whose management rights PharmaResearch acquired in 2021—was in a state of complete capital impairment as of the end of the first half of this year. While its assets totaled approximately 5.5 billion won, its liabilities amounted to about 5.8 billion won, resulting in total equity of -288 million won. The company also posted a net loss of approximately 2.2 billion won in the first half of this year.

PharmaResearch invested approximately 10 billion won to acquire a stake in Medicon in 2021. However, the book value of the investment in Medicon on PharmaResearch’s separate financial statements fell from 700 million won at the end of last year to 0 won as of the end of June this year. This reflects an equity method loss of 700 million won resulting from Medicon’s poor performance in the first half of the year.

The fact that the book value is 0 won does not mean that Medicoson’s corporate value has completely disappeared or that the entire investment amount has been lost. However, given that the book value of the investment asset on the parent company’s separate financial statements has been depleted due to cumulative losses since the acquisition, it can be viewed as an indicator of the investment’s performance to date.

Despite this situation, PharmaResearch held a board meeting on April 13 and approved a loan to Medicoson. The actual amount lent to Medicoson in the first half of the year was 3 billion won, equivalent to 30% of the amount invested in the 2021 equity acquisition. While this is intended as additional support to normalize operations, it remains to be seen whether performance will recover and whether the loan will be repaid.

Book Value of Four Companies with a Combined Investment of 25 Billion Won Stands at 2.6 Billion Won… First-Half Losses Alone Totaled 5.6 Billion Won

Apart from Medicoson, some investments in new businesses have yet to yield clear results. The total initial acquisition cost for the four companies—Medicoson, Pluto, Turing Bio, and Pharmaresearch SG CO., LTD.—was 25.1 billion won. The combined book value of the investment shares in these companies, based on separate financial statements as of the end of the first half of this year, stood at approximately 2.6 billion won, having fallen to 10.5% of the initial acquisition cost.

Earnings have also been lackluster. All four companies posted losses in the first half of this year. The total net loss amounted to 5.6 billion won, broken down as follows: △Medicoson 2.2 billion won, △Pluto 1.3 billion won, △Turing Bio 1.0 billion won, and △PHARMARESEARCH SG CO., LTD. 1.1 billion won.

Impairment losses on goodwill recognized during the M&A process are also continuing. On a consolidated basis, cumulative goodwill impairment losses increased from approximately 2.6 billion won at the end of last year to 3.5 billion won as of the end of June this year. The cumulative impairment rate relative to the acquisition cost of goodwill is approximately 22.8%. In particular, the approximately 800 million won in goodwill remaining at the end of last year related to the Singaporean healthcare service provider Alpha Omega Medical was fully impaired during the first half of this year.

Of course, not all of PharmaResearch’s investments in subsidiaries are underperforming. There are also profitable affiliates, such as PHARMARESEARCH BIO, which operates the botulinum toxin business, and the sales subsidiary PharmaResearch Medicare. The fact that the book value of investment securities has decreased does not necessarily mean that the investment has ultimately failed.

However, it is noteworthy that PharmaResearch has once again positioned M&A as a core growth strategy amid ongoing losses and declining asset values from some past investments. The company has stated that, as part of its plan to enhance corporate value this year, it will review and pursue “M&A of a significant scale” in the domestic and international medical device and cosmetics production and distribution sectors.

Last June, it established PharmaResearch Frontier, a wholly-owned subsidiary responsible for managing its U.S. operations, and invested 24.7 billion won in the company. That same month, it also signed an agreement to acquire the U.S. cosmetics manufacturer CG USA. The specific acquisition price for CG USA was not disclosed.

Investment-related regulations rejected by unanimous opposition at the board meeting… “Related to financial asset management”

It is also noteworthy that PharmaResearch’s board of directors put the brakes on internal regulations related to fund management once earlier this year.

On February 4, the PharmaResearch board rejected the “Motion to Approve Investment Operations and Risk Management Regulations” and the “Motion to Approve Asset Allocation and Investment Limits,” which were put to a vote, with all attending directors voting against them. The reason given for the rejection was that “additional review and refinement are needed regarding the purpose of fund management, criteria for managing risky assets, and the decision-making framework.”

However, the company drew a clear line, stating that these agenda items were not directly related to the M&A or subsidiary investment review systems. If, as the company explained, these items focused on securing excess returns through the management of surplus funds, it would be difficult to directly link them to the M&A review system.

A PharmaResearch official explained, “This proposal was put forward as part of the process of establishing internal regulations and standards to manage the company’s funds more systematically,” adding, “At the time, we reviewed plans to secure excess returns through fund management, but we have decided not to prioritize this proposal at present, given market volatility and other factors.”

The spokesperson continued, “The proposal was rejected at the time because opinions were raised that the purpose of fund management and the decision-making framework needed to be refined in greater detail,” and added, “Since the specific investment limits and scope of risky assets constitute internal standards for fund management and risk management, it is difficult to disclose the details.”

Nevertheless, the key challenge PharmaResearch must prove in the future is its performance in M&A linked to its core business. With cash and cash equivalents totaling 220.3 billion won on a consolidated basis at the end of the first half, the company has ample capacity for additional investment. This means it has become even more critical to determine how to allocate the cash generated from its core business—to which ventures and at what price—to transform it into new growth engines.

Jung Rae-seung, the “second-generation owner and former investment analyst,” faces a test of his M&A performance

In this process, the role of Executive Director Jeong Rae-seung, who oversees the formulation and review of investment strategies, is also coming to the fore. Director Jeong is the son of Chairman Jeong Sang-soo, the company’s founder and largest shareholder. As PharmaResearch accelerates its external growth by leveraging its cash reserves, the second-generation owner has effectively taken center stage in the company’s investment strategy.

After graduating from the Korea University Graduate School of Business (MBA), Director Jeong worked as an investment analyst at Albatross Investment. He currently oversees the formulation and review of investment strategies at PharmaResearch while also serving as CEO of the gaming company Pixelity. Given his background as the second-generation owner combined with his experience in the investment industry, future M&A results are likely to serve as a key benchmark for evaluating Director Jeong’s management capabilities.

In particular, given that PharmaResearch has signaled plans for “M&A on a significant scale,” analysts suggest that the company will need to demonstrate results throughout the entire process—from determining a fair acquisition price to post-merger integration (PMI) and improving performance—rather than merely identifying promising investment targets. This is because acquiring a company at an inflated price or failing to generate synergies after the acquisition could actually erode corporate value.

The fact that equity method losses and goodwill impairments are continuing in some existing investments is expected to weigh on Director Jeong. A source in the medical device industry stated, “PharmaResearch’s M&A performance will serve as a test of Director Jeong’s management capabilities as the second-generation owner,” adding, “For now, the cumulative decline in the value of investment assets is likely to be a burden.”