Concerns are growing in the biotech industry that another harsh winter may be coming after allegations surfaced that Minister of Justice nominee Kim Seung-won asked the Ministery of Food and Drug Safety chief to approve the clinical plan of biotech company Genencell. Even now, as investment funds are concentrating in a few sectors such as semiconductors and a cold wind is blowing through biotech, the Genencell scandal could further dent investor sentiment if trust in biotech investing is shaken.
An official at a new technology business finance specialty company that mainly invests in the biotech sector said, "In the past, when issues involving even politicians arose at biotech corporations, the entire biotech sector was often affected," and added, "Genencell, an unlisted company, is linked to many listed companies, and this scandal lays bare the structural problems of the biotech industry, so it could impact listed biotech companies as well."
As experts have diagnosed, listed biotech companies—especially corporations that step forward to develop new drugs—have repeatedly seen share prices soar on favorable news such as new drug development or clinical trial results, only to plunge when trials later fail.
In this process, when it is found that a company's major shareholders or management took unfair gains, the damage grew larger. SillaJen(215600), which entered the KOSDAQ market in 2016 and once ranked No. 2 in market capitalization, saw its stock price surge just before U.S. clinical trials. But after management, who knew in advance of the clinical failure, sold a large volume of shares, the price crashed, and the company even faced a delisting crisis.
◇ Biotech listings particularly vulnerable to unfair trading
The reason biotech corporations are especially often entangled in unfair transactions is that it is virtually impossible for retail investors to verify the technology of new drugs or therapies.
In the case of Genencell, which claimed to be developing a COVID-19 treatment, the founder is a professor at the college of Korean medicine at Kyunghee University. The individual has expertise in developing drug candidates from natural-material-based functional ingredients, and Genencell formed an industry-academic cooperation group with Kyunghee University and listed companies. From an investor's perspective, there is a high chance of judging it as a corporation with considerable technology.
Shin Poong Pharm, whose stock price soared more than 2,000% during the pandemic, is a similar case. Founded in 1962, Shin Poong Pharm was a company that sold generics such as blood pressure medicine and anti-inflammatory analgesics.
Then, when the Ministery of Food and Drug Safety approved a phase 2 clinical trial to confirm COVID-19 treatment efficacy for Shin Poong Pharm's malaria drug "Pyramax" during COVID-19, the stock price skyrocketed. But after it failed to produce meaningful clinical results and allegations of wrongdoing by management surfaced, the stock price plunged.
An analyst covering pharmaceuticals at a small and mid-sized securities firm said, "Companies sometimes promote cases of technology out-licensing to global drugmakers to prove their technology, but because many are returned, it's hard to immediately judge that as recognition of technological strength," and added, "Investors should be cautious with biotech corporations for which securities firm research centers do not publish official analytical reports."
◇ It takes more than a decade and hundreds of billions of won to make money
Another reason listed biotech corporations are especially prone to scandals is that it takes long verification and massive investment expense before they actually turn a profit.
In the case of Invossa, the world's first gene therapy for osteoarthritis developed by Kolon TissueGene(950160), an affiliate of Kolon Group, development began in 1999 and it took 18 years to see its first domestic sales in 2017. The funds poured in exceeded 200 billion won.
However, two years later, during phase 3 trials with the U.S. Food and Drug Administration, a component mix-up was discovered, the U.S. trial was halted, and the product license was canceled in Korea. Lengthy legal proceedings followed, and while phase 3 trials are again underway in the United States, it will take several more years for a new drug to reach the market.
An analyst covering biotech at a major securities firm said, "For biotech corporations to make money, technology alone is not enough; they must endure the verification, approval, and commercialization process that takes more than a dozen years," and added, "Because of this, even corporations with real technology can be tempted by dark forces during the long slog of investment and patience."
Companies that at least have technology or the will to persevere are in a better position. That is because there are many cases of intentionally moving stock prices and taking unfair gains by exploiting these characteristics of the biotech business.
◇ A fragile biotech investment ecosystem… IPOs are the only path
In general, businesses with very low odds of success that require massive capital and long-term investment but can generate large profits if they succeed belong to professional investors. Most governments designate biotech as an innovation industry and provide budget support, and in advanced countries biotech funding is centered on professional venture investors and other financial investors (FI) for this reason.
However, in Korea, where a proper investment ecosystem has yet to form, the only practical way for biotech corporations to raise investment funds relatively easily is an initial public offering (IPO).