Platform Technology Players Deserve Attention
The authors are analysts of NH Investment & Securities. They can be reached at william.ku@nhqv.com and weihan@nhqv.com, respectively. – Ed.
1. Confident towards domestic bio sector’s mid/long-term growth potential
Domestic bio sector: 20-year-long new drug development history
Korea’s first domestically-developed new drug Sunpla (an anti-cancer agent) was approved by the Korea Food & Drug Administration (KFDA) in 1999. In 2003, with LG Life Science’s Factive (antibacterial drug) obtaining the US FDA approval (the first Korean-made drug that was approved in the US), market expectations for the Korean bio industry soared. But, sales of Factive proved almost non-existent, and the bio sector experienced a decade-long stagnation. In 2013, however, with Celltrion’s Remsima (biosimilar) obtaining European approval, the bio sector’s Kosdaq market-cap weighting came to exceed 13%. Since that time, Hanmi Pharm’s major licensing-out deals on its pipeline drugs and emergence of globally competitive Korean cell & gene therapy developers (Viromed, Tissuegene) have pushed up the bio sector’s weighting in the stock market further upwardly. More recently, following the news of SK Biopharm’s direct selling its new drug in the US market, the sector weighting in the Kospi has also approached 9%-level. Moving ahead, we believe the domestic bio sector will serve as a major pillar of Korean economy’s future growth.
2. Major business conglomerates benefiting from active investment and favorable government policies
Active investment by major domestic business groups
Korea’s major business conglomerates such as LG, Hanwha, and CJ have also actively engaged in investment in new bio businesses. Although there have been major ups and downs along the way, Samsung and SK Groups of late have been delivering tangible achievements in the field. We note that Samsung Group has invested around W2tn in Samsung Biologics and W1.5tn in Samsung Bioepis, and SK Group has directed a total of W800bn to SK BioPharm and W1tn to SK Biotech.
Tesla Policy
In 2017, the Korean Stock Exchange has introduced a so-called ‘Tesla Policy’, a special track for Kosdaq listing that allows an IPO for a company with future potential but which has not yet posted profits. And, since then, many bio startups have been listed on the Kosdaq through the measure, and thus given access to public funding. We note that after four years from the listing, the workforce size at these companies has upped by an average of 75%, and it takes an average of 7.7 years for them to produce tangible technological feats. We believe that the government’s favorable policy measures have also played a role in nurturing the domestic bio sector.
3. Transparent disclosure helps to strengthen market confidence
Data-based investment has become the norm
In 2H19, the domestic bio sectors suffered a major downfall in response to news of failed clinical trials (phase III) for promising pipeline drugs. But, we believe that these painful experiences have helped to sharpen domestic investors’ insight regarding investment in bio plays. Today, investors are making their bets based on data such as news of licensing-out deals or announcement of clinical trial results at conferences. Over 2019~2020 (YTD), the shares of the only two Korean players (LgeoChemBio, Alteogen) boasting ADC platform proprietary technologies have surged strongly. On its side, the Korea Stock Exchange has strengthened disclosure rules, requiring companies to make more transparent disclosure of their clinical trials results. In 1H20, defying the Covid-19 crisis, MedPacto and NKMAX have posted sound share price performances on their announcements at major conferences of successful clinical trial results. Against this backdrop, data-based investment decisions appear to have become the bio sector norm.
4. Focus on platform technology owners and first-in-class drug developers
Platform technology players deserve attention
Having seen a series of failure of clinical trials for SillaJen, Helixmith (formerly known as Viromed), and HLB’s promising pipeline drugs, domestic investors have learned the hard way that it would be wise to invest in bio companies possessing either drugs in strong demand or pipeline drugs in late stage of clinical trials. And, following the recent listing of SK Biopharm, investors should soon see the impacts of a domestic new drug’s direct sales in the US market upon the related firm’s share price. That said, regarding biotech firms in their early stages, it is not easy to identify promising stocks. In our view, the primary selection criteria for these biotech players should be whether they have: 1) first-in-class drugs; or 2) promising platform technology. Additional potential considerations include whether they: 3) transparently disclose clinical trial results; and 4) have a track-record of licensing-out deals. Based on the above-mentioned criteria, we suggest Hanall Biopharma, Genexine, and Olix as promising domestic players.