As investors are recently growing more and more interested in the biotechnology industry worldwide, not only listed companies but also unlisted ones are attracting much investment.
Since biotechnology firms need to focus on research and development for a long time, they have difficulties accomplishing their sales goals, and suffer a huge operating loss. Thus, the Small and Medium Enterprise Establishment Investment Association has been the major investor in the industry, in particular, for small and medium companies.
According to the data released by Korean Venture Capital Institute from January 2011 to August 2015, the Small and Medium Enterprise Establishment Investment Association made a 93.3 billion won (US$79.74 million) investment in the biotechnology sector in 2011, accounting 7.4 percent of 1.6 trillion won (US$1.37 billion) in the total areas. However, its investments in the sector amounted to 292.8 billion won (US$250.26 million) in 2014, taking up 17.9 percent of the total of 1.6 trillion won (US$1.37 billion). The figure increased by 3.13 times in volume, showing the share of the biotechnology sector in total areas grew significantly.
The rapid increase in domestic biotechnology industry investments was largely due to the effort of the Korea Exchange (KRX). In December 2005, the KRX created the special clauses to enable a listing on the stock market through technology evaluation and started applying them to biotechnology firms. Previously, a company had to achieve an ordinary profit and operating profit rate of more than five percent in order to go public. Most biotechnology companies couldn’t make a net profit due to the cost for massive research and development investment. Thus, it was impossible for them to list their company as they failed to meet such requirements.
In 2015, a total of 14 firms went public with the special listed stock corporation system through the technology evaluation. Thirteen out of the 14 were biotechnology companies, such as ViroMed Co., Bioneer Inc., and Crystal Genomics Inc. These firms were able to succeed in developing new technologies based on the initial public offering (IPO) fund. In particular, the market capitalization of gene therapy drug manufacturers like ViroMed and Genexine Inc. rose to the range from 700 billion won (US$598.29 million) to over 2 trillion won (US$1.71 billion), becoming a good indicator for investors in the biotechnology industry.
Tasks to Solve
However, there are tasks to be solved for better results, though the investment in the biotechnology sector has shown a great growth compared to that of 10 years ago. They are to raise the subscribed capital and to activate the investment in start-up companies. Until the first half of 2015, 51 biotechnology firms around the world, including only two Korean ones – Genofocus Inc. and Corestem Inc., were listed and collected a total of 5 trillion won (US$4.27 billion) initial public offering. However, the two Korean companies, which succeeded in going public, accounting 3.9 percent of the total firms and 1 percent of the total investment. During the same period, Chian’s Shanghai Huabao Biological Technology Co. and 3SBio Inc. raised 300 billion won (US$256.41 million) and 600 billion won (US$512.82 million) in IPO, respectively, while Taiwan’s OBI Pharma Inc. collected 200 billion won (US$170.94 million). In Korea, on the other hand, Genofocus and Corestem achieved 13.2 billion won (US$11.28 million) and 40 billion won (US$34.19 million) of the IPO funds, respectively. This was because the domestic market prioritizes the protection of investors and limits the total amount of public subscription, which will impose a restriction on the sound competition among biotech companies.
Fortunately, public offering funds skyrocketed to 129.8 billion won (US$110.94 million) in the second half of 2015 as 12 Korean biotechnology firms were listed on KOSDAQ with the aggressive screening of the KRX through the technology evaluation. Although three firms – PanGen Biotech Inc., Anterogen Co. and Qurient Co. – canceled the IPO in the second half of the year due to a slump in the biotechnology market, a total of 10 companies succeeded in raising 183 billion won (US$156.41 million) through public offerings in 2015, attracting an average 18.3 billion won (US$15.64 million) per company. The figure is still lower than the average in competitor countries, including those of the United States with US$103 million (120.51 billion won), Europe with US$51 million (59.67 billion won) and China with US$293 million (342.81 billion won).
Another problem is that most domestic investors in the sector are only making investments in mature companies through pre-IPO or listed firms. This is attributable to the slow establishments of startups, but largely to the structural problem that there is no fund association to take charge of investments in the startups at the early stage in accordance with funds getting larger.
Supports for Biotech Startups
Recently, the number of biotech startups is plunging, for which there are various reasons. Unlike IT companies which need just some computer equipment to start the company, biotechnology companies require many experiment devices. In a bid to create a laboratory, they need a considerable amount of initial capital to purchase equipment such as centrifuges and PCR equipment.
Even Youth Start-up Fund, which supports a large number of IT companies, makes an investment in biotech venture companies only when the founder is under 39 years of age or more than 50 percent of employees are in their twenties. As the result, founders of biotech firms have difficulties receiving aids from investment associations because they fail to meet such requirements after they finish their doctoral course or build their career at research institutes.
Accordingly, the situation needs a kind of ladder for early-stage biotech companies to raise investment funds and develop business models, for which diverse solutions are coming out. First, there is the crowdfunding system, a type of online fund-raising method that lets people invest small amounts of money according to the law of the Capital Market and Financial Investment. The system has started taking effect from January 25, 2016, after the amendment of the Capital Market Act that passed the National Assembly on July 6, 2015. In short, it allows individuals to invest up to 2 million won (US$1,709) in a single start-up, and 5 million won (US$4,273) collectively over the year. In last November, 36 companies from 18 Creative Economy Innovation Centers across the nation participated in the “Creative Economy Innovation Center’s Crowdfunding Mock Investment Contest 2015” hosted by the Ministry of Science, ICT and Future Planning and the Creative Economy Initiative Public-Private Partnership, and attracted 52.9 billion won (US$45.21 million) from 22,670 investors.
Secondly, a micro-venture capital fund, or Micro-VC, is the one that the Korea Venture Investment (KVI) under the Small and Medium Business Administration (SMBA) seeks to create. The Micro-VC is invested in small and mid-size and venture companies or founders with less than three years of history in the business that has more than 5 percent of the ratio of R&D investment to sales and less than 1 billion won (US$854,701) of annual sales. The KVI is to invest 132 billion won (US$112.82 million), leading the total investment amount to reach 174.5 billion won (US$149.15 million). Thus, the Micro-VC is expected to become a major investment source for startups.
In addition, there is a Tech Incubator Program for Startup (TIPS), which is led by the private sector. The program provides aid packages, including angel investment, training, mentoring and R&D funds, for the startups that have potential technologies to lead the global market. The startups are selected by the private sector consisting of 18 investment accelerators, successful angel investors and tech giants. The program enables a venture firm to secure up to 1 billion won (US$854,701) when the company attracts a 250 million won (US$213,675) investment from an accelerator, which naturally leads to an additional investment of 750 million won (US$641,026) from the government.
The investment in biotech venture firms has achieved a remarkable growth over the last 10 years, keeping in line with the development of the Korean biotechnology industry. Such an achievement was possible largely due to the successful introduction of appropriate policies, including the technology evaluation of KOSDAQ market.
The investment in early-stage startups is recently decreasing relatively. Under the circumstance, the Korean biotechnology should try to overcome hurdles to the slowness and be the backbone which leads the Korean economy by creating new systems and policies.