Is this a growth pain or a bomb game?
With biotech stocks still showing a sharply upward tendency, voices urging to brace for a bubble burst of small and mid-sized biotech stocks are growing. They point out that the bubble bursting time is gradually approaching due to several unfavorable factors such as abnormal overvaluation based on only expectations, accounting problems and a string of clinical trial failures. Some even say that it will leave a greater blow than the bubble burst in the information technology (IT) sector in 2000. In particular, small and mid-sized biotech shares leveraging the rise of large biotech stocks, like Celltrion Inc. and Samsung BioLogics Co., require great care.
According to the main bourse operator Korea Exchange (KRX) on April 18, eight out of 10 stocks that have shown the highest growth this year are biotech shares. Feelux Co., which has expanded its business to the biotechnology market by acquiring U.S.-based drug developers, saw its stock prices surge as much as 555 percent this year. Inscobee Inc., Bionics Co. and Samil Pharmaceutical Co. also showed a steep increase of more than 400 percent in just four months. By contrast, the country's main bourse KOSPI and the secondary KOSDAQ had a mere 0.5 percent and 11.9 percent growth, respectively, over the same period.
Compared to other biotech stock indexes overseas, the domestic biotech share market shows a clear sign of overheating. According to Eugene Investment & Securities Co., South Korea’s KRX Health Care Index and KOSDAQ Pharmaceutical Index jumped a whopping 96.5 percent and 123.3 percent, respectively, in the past year, while U.S.’ NASDAQ Biotechnology Index increased 8.8 percent. Han Byung-hwa, an analyst at Eugene Investment and Securities Co., said, “There are some small and mid-sized biotech stocks that have been reevaluated after their actual value of pipelines are on the rise. However, most of them are abnormally overvalued. The party in the biotech market is about to be finished in a situation in where it has turned out to be a money game.” Currently, biotech stock prices soar with the news of securing a substance for the preclinical phase alone, instead of concrete reasons such as marketing approval at home and abroad, technology exportation and sales performance in the market. In short, a considerable number of investors continues to blindly make an investment. It is actually a “bomb game.”
The biotech industry recently has a less freedom of movement because of stricter accounting regulations. Financial authorities have launched the pre-review on biotech firms’ research and development (R&D) expenses. Until now, biotech companies have classified R&D investments into intangible assets, instead of costs. So, the latest move is to consider whether such a practice is appropriate. Recently, the stock price of CHA Biotech Co. plummeted as the company received a “limited” opinion for its audit report from accounting firms on account of such an accounting problem.
There are still “mines,” including clinical failures. After NatureCell Co. failed to acquire a conditional permission for JointStem, a stem cell treatment agent for degenerative arthritis, from the Ministry of Food and Drug Safety last month, it lost 1 trillion won (US$938.09 million) of market capitalization. In addition, Genexine Inc. recently decided to discontinue clinical tests on two anti-cancer treatment candidate materials based on stem cells – GX-02 and GX-051. Since clinical research usually takes place over long periods of time, it is often halted later even after exporting technology in an early stage or fails to receive marketing approval. A case in point is Hanmi Pharmaceutical Co., which is considered one of the top pharmaceutical companies in the nation but saw its three clinical tests discontinue owing to global pharmaceutical firms even after exporting technology. This is why new drug development is often compared to “0.001 percent of challenge.” The price of Hanmi Pharmaceutical shares has increased by seven times and then halved so far. Kolon Life Science Inc. also saw its technology export deal of Invossa, a cell-mediated gene therapy for osteoarthritis, worth 500 billion won (US$469.04 million) is cancelled last year. An official from the biotech industry said, “It is very rare that candidate materials actually lead to the release of new drugs. So, there must be numerous failures in the development process. However, companies with sound foundations, such as pipelines and clinical status, are more likely to survive.”
The KOSDAQ index plunged as much as 80 percent in 2000 when the IT bubble burst. Han Byung-hwa from Eugene Investment and Securities, said, “The IT bubble in the past was a global phenomenon and had some good effects, including the advancement of technology. However, the biotech bubble, which is only shown in South Korea, is expected to leave a greater impact after the collapse. Investors should turn to other sound small and medium-sized company stocks in other sectors instead of biotech.”