South Korean drug company SK Bioscience has valued itself at more than six trillion won ($5.38 billion) for its initial public offering (IPO), highlighting its growth potential.

The valuation was nearly 6.34 trillion won in the registration statement submitted by SK Bioscience, which amounts to its peer group’s enterprise value (EV)/capacity multiple of 2.64 times multiplied by the firm’s production capacity of 23,924 liters.

SK Bioscience set an offering price in a band of 49,000 won and 65,000 won per share, after applying a discount rate of 20.99% to 40.44% to its valuation per share of 82,267 won. When calculating its EV/capacity multiples, the company included global contract manufacturing organizations (CMOs) in its peer group, including Samsung Biologics, which has an EV/capacity multiple of 1.44 times, Switzerland-based Lonza with 1.27 times, and China’s WuXi Biologics with 5.21 times. 

The South Korean firm’s market strength is in vaccine CMOs. It released SKY Varicella, a chicken pox vaccine, and Skyzoster, the world’s second vaccine for herpes zoster, a viral disease also known as shingles. 

SK Biosciences’ L HOUSE vaccine center located in Andong, North Gyeongsang Province, is estimated to be able to produce up to 500 million vaccine doses per year. The firm has signed CMO contracts for Covid-19 vaccines with global pharmaceutical companies, including U.K.-based AstraZeneca and U.S.-based Novavax.

However, its IPO valuation seems controversial as investors prefer to use a price earnings ratio (PER)-based method. There is little room for controversy in the PER-based formula because the value is calculated based on the current net income and it is easy to determine whether the valuation is appropriate.

In contrast, EV/capacity is valued according to production capability, and the biggest blind spot is that this does not necessarily lead to a company’s income. A fair value of a company is determined by how solid its relationships are with clients, and how stable and sustainable its orders are in the market.

IB industry sources see a rosy outlook for SK Bioscience, as the CMO market has a high entry barrier. There are few plants like L HOUSE in the global market, while supply is limited and demand is huge.

It also requires an astronomical amount of money to enter the business. SK Bioscience has reportedly spent around 500 billion won to secure its current production capacity, including output at the L HOUSE.

Global vaccine developers are producing their drugs via proven CMOs. Moderna, which has a vaccine with a high efficacy, has signed a partnership with Lonza, a peer firm of SK Bioscience. Founded in 1897, Lonza has a production capacity of 261,000 liters and its market capitalization is over 12 trillion won.

“The Covid-19 vaccine business is a CMO’s market, where a CMO chooses a pharmaceutical company rather than the other way around,” an industry source said. “This is because the market is not easy for competitors to enter in the short term.” (Reporting by Kyung-ju Lee)