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GemVax & KAEL withdrew its rights offering after failing to clear the financial regulator's threshold. For GemVax & KAEL, which faces a long road to develop new drugs including entering phase 3 clinical trials for Alzheimer's drug candidate GV1001 and developing a treatment for eukaryotic inclusion body myopathy, the financial burden has grown. In particular, the company needs to secure funds to redeem bonds with warrants (BW).
Some observers worry that because the company was repeatedly criticized by the Financial Supervisory Service during the push for the rights offering and the announcement of the clinical failure, future fundraising may not be easy.
A BW is a bond that includes the right to purchase the company's new shares at a predetermined price. BW investors receive interest from the bond investment and can realize gains by acquiring new shares cheaply if the stock price exceeds the exercise price.
The outstanding BWs of GemVax & KAEL are the 7th, 8th, 10th and 11th issues, four tranches in total. Some BWs are held by Gem & Company, which serves as GemVax & KAEL's holding company, but the remaining volume is held by individual retail investors.
Exercise prices are currently set in the 11,000–16,000 won range. Considering the current stock price is in the 40,000 won range, exercising the issuance would yield a market gain of 3–4 times.
But given GemVax & KAEL's financial situation, BW investors also have reasons to worry. As of June, GemVax & KAEL held only about 14 billion won in cash and cash equivalents. Having posted operating losses for four consecutive years through last year, it is virtually impossible to raise capital from operations alone.
On the other hand, the remaining BW issuance balance amounts to 50 billion won. While there is still time before redemption, the need to spend massive funds on the GV1001 clinical trials means the company effectively lacks the capacity to repay principal.
In fact, GemVax & KAEL planned to use this rights offering to raise some funds to repay loans. Of the roughly 240 billion won in rights offering proceeds, 44.2 billion won was to be used for debt repayment. Currently, GemVax & KAEL incurs about 2 billion won a year in interest expenses and cannot cover loan interest with operating income.
BW investors have another concern. Samsung Pharm, an affiliate of GemVax & KAEL, sparked controversy after using most of the funds from a 40.6 billion won rights offering last year for working capital that had been designated as a third-priority use. Critics say the fundraising and use of funds have been conducted opaquely.
Regarding future capital raising plans, GemVax & KAEL said it intends to pursue private placements instead of a rights offering. On the 11th, GemVax & KAEL said it would "swiftly bolster capital through private placements after announcing the extended clinical trial results for eukaryotic inclusion body myopathy" and that it would "resolve short-term liquidity risks and finalize the previously uncertain fundraising plan."
The change in GemVax & KAEL's capital-raising approach effectively suggests either a third-party allotment rights offering or additional mezzanine issuance. However, given a previous clinical failure announcement, it is unclear whether private placement fundraising will be as easy as before. In fact, UNION KOREA PHARM last year sought to issue convertible bonds to repay an early BW redemption claim of 19.2 billion won, but payment problems raised fears of default.
GemVax & KAEL's mezzanine issuance limit is small relative to the funds needed. The company's BW issuance limit is only about 100 billion won.
A financial investment industry source said, "While it is highly unlikely GemVax & KAEL will be unable to repay bond principal, the fact that it announced a massive rights offering in the 200 billion won range and then reported a clinical failure, drawing a critical eye from financial regulators, is a concern," adding, "With massive funds needing to continue flowing into GV1001 development, worries about the company's financial condition will persist for a long time."