Korean bio ventures struggle with fundraising

Biopharmaceutical companies of South Korea are having a tough time fundraising of late. Bio ventures without specific public offering plans are particularly facing challenges as venture capital investment in bio has recently slowed.

The decline in bio stocks since last year has prompted a reduction in venture capital investment, industry sources said.

The Korea Exchange (KRX) healthcare index plunged from 5,460.26 on Jan. 4 of last year to 3091.22 on Feb. 28 of this year. This has widened the valuation gap between unlisted bio ventures and VC firms and some 90% of Korean bio ventures have difficulties with fundraising, a VC source said. 

RAISING IPO BARRIERS FOR BIOTECHS

Fundraising via IPOs has been tougher due to rigorous screenings for listing.

A number of Korean tech startups use the so-called technology exception policy, which focuses more on ventures’ technologies and growth potential than sales and operating profits, aiming for a Kosdaq market debut.

But KRX increased the number of screening standards from 26 to 35 last year, which resulted in 10 Korean pharmaceutical ventures withdrawing their IPO applications in 2021. The number of IPOs using the exception policy were 15, 13 and 17 in 2018, 2019 and 2020, respectively -- this dropped to nine last year.

Even listed bio ventures are facing tepid demand from stock investors.

The initial offering price for shares of ToolGen Inc., a biotech that owns genome editing technology, was 70,000 won ($58.1) at its Kosdaq debut last December, more than 30% lower than the earlier-set price band. The stock is currently sluggish – it closed at 51,600 won ($42.8) on Feb. 28, 26% down from the initial offering price.

Listed bio ventures also face challenges with convertible bond issuance due to the recent amendment of Korea’s refixing system.

Last December, the Financial Services System of Korea started mandating that the conversion price of convertible bonds (CBs) be pushed up when the stock price jumps. This reduces capital gains for CB investors and makes CB investment in publicly traded companies very difficult, said Kim Myeong-Hwan, chief executive of BHN Investment Co. of Korea.

UNFAVORABLE EVENTS WORSEN BIO STOCKS

Korea's bio industry has had ample liquidity for the past few years, and it was easier for bio startups to attract rounds of funding due to their new drug pipelines. 

But bio and medical stocks have been hit hard by some recent issues, such as the embezzlement scandals of pharmaceutical company SillaJen Inc. and dental implant manufacturer  Osstem Implant Co. The KRX healthcare index has nosedived 35% over the past six months compared to the Kospi's 16.2% decline.   

The plunge in bio shares is the main factor making fundraising tough. An anonymous bio venture, owning a platform technology for new drug development, is facing challenges with pre-IPO funding due to high valuations. Desperate for funding, the firm is considering raising capital based on its corporate value of five years ago.

“It is hard to set a private enterprise’s corporate value higher than before when publicly traded stocks nosedive,” a VC firm source said. “It might be better to invest in sluggish public company stocks than in private bio ventures without a clear IPO roadmap,” another source said.  

Investors sentiment has further weakened as some bio and pharma companies haven’t been successful in developing COVID-19 vaccines and treatment. “Such companies are facing harsh reality as the Covid-19 stock bubble bursts,” a securities industry source said. “Now, the capital flows are to artificial intelligence and metaverse stocks instead of bio,” another source said.

LOOKING TO MINOR BUSINESSES FOR CASH COWS

Some bio ventures are focusing on their secondary businesses to create cash cows, such as cosmetics and healthcare food.

Cellivery Therapuetics Inc., a Parkinson’s disease treatment developer, acquired a Korean wet wipe manufacturer last November and launched a wet tissue product using biomedical ingredients in January.

Securing cash cows is important for the Kosdaq-listed ventures using the technology exception policy as they could be delisted in five years with less than $3 billion won in annual sales.
 
Shares of Qurient Co., a new drug developer listed in 2016, have been suspended from trading on the Kosdaq since last May as the firm didn’t meet the minimum sales requirement. The drugmaker acquired medical supply distribution company H-Pharm last year to generate sales.

“The listing requirements don’t reflect the nature of the biopharmaceutical industry, which takes over a decade to develop new drugs. This drives bio ventures to focus on secondary businesses for short-term sales,” a bio industry source said.

Write to Jae-Young Han, Woo-Sang Lee and Ju-Hyun Lee at jyhan@hankyung.com
Jihyun Kim edited this article.