[Asia Economy Reporters Hyunseok Yoo and Jihwan Park] The stock price of Shinpung Pharmaceutical, which had gained attention for developing a COVID-19 treatment but then plummeted due to allegations of slush funds, is showing a rollercoaster trend with a recent sharp rise. The future stock price is expected to be determined by the outcomes of the COVID-19 treatment development and the progress of the police investigation. In the worst case, delisting is even being discussed.
According to the Korea Exchange on the 26th, Shinpung Pharmaceutical closed at 34,600 KRW, up 3,250 KRW (10.37%) from the previous day. This is interpreted as a rebound buying influx following the recent sharp decline in Shinpung Pharmaceutical’s stock price. The stock price fell 19.36% on the 24th and dropped another 13.99% the day before, losing 33.35% over two trading days. Based on the previous day’s closing price, Shinpung Pharmaceutical’s stock price has fallen 73.30% since the beginning of the year, ranking second in decline among KOSPI-listed stocks.
Shinpung Pharmaceutical was an ordinary pharmaceutical company engaged in the manufacture and sale of finished drugs and raw materials. It entered the Korea Stock Exchange on January 20, 1990. The reason it attracted market attention was its malaria treatment drug, “Paramax.” Research results showed that the main ingredients of Paramax, pyronaridine phosphate and artesunate, each exhibited inhibitory effects against COVID-19.
Shinpung Pharmaceutical also focused on the potential of the treatment and began clinical trials. In September last year, it received approval for Phase 2 clinical trials for the COVID-19 treatment. Following this news, the company’s market capitalization soared. From just 376 billion KRW on March 19 last year, the market cap exceeded 1 trillion KRW in April, reached 5 trillion KRW in July, and surpassed 11 trillion KRW in September. As of the previous day, it ranked within the top 30 in KOSPI market capitalization.
However, as meaningful results were not produced in the clinical trials, Shinpung Pharmaceutical’s market cap declined. Although clinical results were announced in July, efficacy was not proven. The market cap, which was 10.4962 trillion KRW on December 10 last year, continued to fall and dropped to 3.7579 trillion KRW on July 6, the day after the Phase 2 clinical trial results were announced. Despite the failure to prove efficacy, the company challenged Phase 3 clinical trials. In August, it received approval for oral Phase 3 clinical trials, and on the 4th of this month, it registered the first patient.
Recently, another negative factor hit Shinpung Pharmaceutical, which had been on a downward path. On the 24th, Shinpung Pharmaceutical was subjected to a police raid amid allegations that it manipulated transaction records with raw material suppliers and embezzled money to create slush funds. Following this news, Shinpung Pharmaceutical’s market cap shrank to 2 trillion KRW on the 24th and 1.6 trillion KRW the day before. The company is suspected of having fabricated false transactions with pharmaceutical raw material companies and inflated raw material prices over more than ten years since the mid-2000s, creating slush funds amounting to about 25 billion KRW.
In particular, there is even the possibility of delisting depending on the case. According to the Korea Exchange’s delisting criteria for KOSPI-listed companies, if the amount embezzled or breached by the management exceeds 5% of the company’s equity capital, the exchange initiates a substantial review of listing eligibility. Currently, the amount of embezzlement and breach specified by the police for Shinpung Pharmaceutical amounts to 6.7% of Shinpung Pharmaceutical’s equity capital (374.3 billion KRW) as of the end of last year. A Korea Exchange official said, “At the stage when the police investigation begins, the exchange does not put specific stocks under the delisting substantial review. After the slush fund allegations are finally confirmed and disclosed, the exchange comprehensively reviews the scale of investor damage, corporate continuity, financial soundness, and governance to decide whether to proceed with the listing delisting corporate review committee.”
There is also a possibility that Shinpung Pharmaceutical will be stigmatized with accounting fraud again after 10 years. In 2011, the Securities and Futures Commission under the Financial Services Commission judged that Shinpung Pharmaceutical intentionally committed accounting errors by not accounting for sales rebates used as sales promotion expenses and overstating accounts receivable by 10.7 billion KRW during the 2009 and 2010 fiscal years. Accordingly, on May 11 of the same year, the commission imposed a fine of 26.2 million KRW, designated an auditor for two years, recommended the dismissal of CEO Jang Won-jun, and notified the prosecution. The penalty standards for violations of accounting standards vary depending on the intentionality and scale of the illegal act. Generally, if the CEO illegally withdraws company funds and embezzles them, it can be linked to “illegal act receivables,” in which case the Financial Supervisory Service may impose maximum penalties such as fines, dismissal recommendations, and prosecution reports or notifications against the company and its executives.
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