[VIEWPOINT]Kosdaq Is a Barrier to Biotech Advances

As biotechnology increases in importance, the government and businesses are drawing up measures to develop the technology. Although large corporations have announced ambitious plans, they lack specific strategies and have made no serious investments. Therefore, Korea's biotech industry is still in a phase where government leadership is important.

The number of biotech start-up companies has grown explosively to around 500, a 10-fold increase from two years ago. The biotech frenzy was fueled by a combination of government support for the industry, massive cash inflows into the sector in late 1999, the completion of the human genome project, media coverage and investors' and scientists' dream of "striking gold."

It can be said that the nation's biotech industry is now in a realignment stage before it becomes mature. Only a small number of promising businesses will be able to survive. The question is how a company which has the technology and management skills to expand can find financing. Direct government support should be minimized because the industry may become dependent on help from the government.

Korea's large corporations tend to avoid risky entrepreneurial ideas and depend on reproductions which promise a recovery of their investments in a short period of time. Also, big businesses rarely understand the ownership structure and dynamics peculiar to start-ups, so there are limits in forging strategic alliances among large firms and hot-shot start-ups. So small biotech firms have to tap capital markets to raise cash. That requires a listing on the Kosdaq stock exchange. The problem is that the Kosdaq Market Regulation Committee, the secondary exchange's watchdog agency, focuses strongly on sales volume of applicants for listings. The country's biotech firms can be divided into two groups: high-tech-oriented start-ups and traditional biological product manufacturers. The former focus on the genome project, biochips and new drugs, while the latter have been selling health foods, animal feeds and processed enzymes.

The term "biotech" means, of course, new products based on cutting-edge technologies. But many such technology-centered businesses have no or very small sales because of the long period it takes to bring a new technology to market. Thus, confounding expectations, the major beneficiaries of the biotech frenzy have been traditional biotech companies, and many high-tech firms have died out or ended up selling common products that they did not plan to produce, in a desperate attempt to boost sales to the levels necessary for a listing on the Kosdaq exchange.

While quite a few biotech companies that are going public on the U.S. Nasdaq market do not have sales or operating profits, the Kosdaq market puts so much emphasis on investor protection that the market nurtures manufacturing companies that are comfortable with their status quo, rather than innovative businesses with future value. That makes it extremely difficult for high-tech firms to grow spontaneously.

The Kosdaq market did the right thing when it recently announced strengthened exit rules for listed companies as part of its efforts to protect investors. Nevertheless, it is undesirable, on a national level as well as a corporate and investor level, to impose unnecessarily high entry barriers by using sales as a benchmark. Of course, the rules should be beefed up in some areas. Because cutting-edge technologies are very difficult for investors to understand and highly risky, it is essential to provide investors with relevant information and objective analyses. However, leaving the responsibility for investment results to the market would be more desirable for establishing a healthy market economy.

No matter how much the government invests or provides financial support, if start-ups cannot get a market listing, most will die or be taken over by foreign businesses. Then, the dream of building Korea as a global biotech powerhouse has no chance of coming true.

From that point of view, improving the listing requirements of the Kosdaq market would be more important measures to nurture the biotech industry than any other kind of support.

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The writer is a professor of genetic engineering at Seoul National University.

by Kim Sun-young