[Listing Regulations Crushing Bio Dreams] ③ Worsening Internal and External Conditions Squeeze 'Bio Seedlings'

Venture Investment Winter Hits Bio Startups Hard

Editor's NoteNew drug development is a race against time and a test of patience. It typically requires investing hundreds of billions of won over at least a decade before any results are realized. However, Korean bio startups are being pushed into a race that lasts only three to five years. In reality, they have no choice but to rely on the stock market to raise initial funding. If they fail to meet evaluation criteria based on simple figures such as net loss before tax or sales revenue within a short period, they are forced out of the market and deprived of their future. The fact that bio startups, which entered the market with the technological capabilities to lead the future of 'K-Bio,' end up focusing on 'managing their books' and pursuing completely unrelated businesses is a reflection of this structure. Asia Economy examines these phenomena and their causes, and proposes long-term solutions.

[Listing Regulations Crushing Bio Dreams] ① How did this promising bio company end up selling bread?

[Listing Regulations Crushing Bio Dreams] ② "Leaving Korea for Nasdaq in the US after 27 years of chasing a dream"

[Listing Regulations Crushing Bio Dreams] ③ Worsening Internal and External Conditions Squeeze 'Bio Seedlings'

[Listing Regulations Crushing Bio Dreams] ④ "R&D Investment Should Be Recognized as an Asset, Not a Cost"

The internal and external funding environment surrounding bio startups is deteriorating. Amid continued high interest rates due to global monetary tightening, external factors such as supply chain risks arising from the US-China competition for technological supremacy and US regulations on bio technology exports are making the outlook more uncertain than ever.

On top of this, as the domestic economy slumps and investor sentiment freezes, the number of new venture capital (VC) investments has plummeted since the second half of 2022, with the trend becoming even more pronounced in 2023. An industry insider in venture investment lamented, "New private capital inflows into the bio sector, which is considered a high-risk industry, have virtually dried up."

According to the bio industry as of June 18, VC investment in the bio and medical sectors reached 3.4167 trillion won in 2021, but shrank to 1.8375 trillion won last year. In just three years, the figure has been cut in half. Last year's bio and medical investment increased by only 7.4% compared to the previous year, falling short of the overall venture investment growth rate of 9.5%. The share of bio in the venture investment market also dropped from 29% in 2020 to around 15% in 2023, reducing to less than half in four years.

Most domestic new drug development bio startups have entered KOSDAQ through the technology exception listing system to secure large-scale research funding. This system allows companies with outstanding technology to go public even if they lack strong financial results. However, there are still accounting conditions attached to the exception. If a company records annual sales of less than 3 billion won or has a net loss before tax exceeding 50% of its equity capital in more than two out of the last three years, it is designated as an under watch company.

Being designated as an under watch company means being subject to delisting review. For companies listed under the technology exception, these requirements are deferred for a certain period: the sales requirement is waived for five years after listing, and the net loss before tax requirement is waived for three years. The problem is that as soon as the grace period ends, a significant number of companies fail to meet these standards and are exposed to the risk of being designated as under watch companies.

Bio startups that went public under the technology exception in 2018 and 2019 began to see their sales (five-year) and net loss before tax (three-year) exceptions expire last year. Among them, more than ten companies were designated as under watch due to failing the net loss before tax requirement, including Bridge Biotherapeutics, Dx&Vx, SCM Lifescience, Kainosmed, and Cellumed.

This year, companies that went public between October 2019 and September 2020 must achieve at least 3 billion won in sales. However, 10 out of the 22 companies listed during this period failed to reach 3 billion won in sales last year. Nearly half of the bio companies listed through the technology exception are now facing the 'five-year time bomb' this year.

As bio startups, whose developing new drugs were once recognized for their value and potential, now stand at the brink of being forced out, concerns among industry insiders and investors are rising. PharmAbcine, which was developing bispecific antibody drugs, went public on KOSDAQ in 2019 through the technology exception but recorded less than 3 billion won in annual sales for three consecutive years from 2021. Its net loss before tax also exceeded half of its equity capital, and it recently received a delisting notice.

Yoo Jin San, co-founder of PharmAbcine, appealed on his personal social media, saying, "If PharmAbcine is delisted as a zombie company, many other companies could be delisted in succession, which could lead to the collapse of the entire 'K-Bio' ecosystem."

Financial authorities maintain that management measures are inevitable since companies failed to meet the business plans and performance targets presented at the time of the initial public offering. Both companies have filed for injunctions with the court to suspend the delisting process, and the procedures are currently on hold.

An industry insider in the pharmaceutical and bio sector pointed out, "Given the nature of new drug development, deficits are inevitable for a certain period, so the net loss before tax requirement does not reflect a company's current value or future potential." He added, "In reality, developing a single new drug takes an average of more than 10 years and hundreds of billions of won in clinical costs, but applying short-term financial performance standards makes even well-funded companies hesitant to invest in new drug development."