One tech firm’s woes deflate whole Kosdaq

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One tech firm’s woes deflate whole Kosdaq


The fragility of Korea’s tech-heavy junior market, Kosdaq, which was on a roll recently, was exposed last week as a single accusation was all it took to the pull the market down.

The Kosdaq recovered somewhat on Monday, gaining 1.25 percent or 8.65 points to close at 699.39 after loosing more than 6 trillion won ($5.6 billion) between last Wednesday and Friday.

All it took was a consumer protection agency claim that a listed biotech firm used the wrong herb in its products.

Since March, when the central bank lowered the key interest rate to a record low of 1.75 percent, the Kosdaq has been on a giddy upswing and it seemed as though nothing could stop it as new highs kept being reached.

As of last Tuesday, April 21, the Kosdaq closed at 714.52, the highest mark in more than seven years. Total market capitalization surpassed 190 trillion won for the first time. Market analysts released rosy outlooks for the market going forward.

The giddiness vanished on Wednesday. Compared with Tuesday’s close, the market was 3.4 percent lower than Friday’s close of 690.74.

In terms of total market capitalization, the market lost a total of about 6.3 trillion won in three days.

The shock on the Kosdaq came after the Korea Consumer Agency on Wednesday announced that Natural Endotech, a biotech company specializing in natural pharmaceutical products using rare herbs, was playing fast and loose with its ingredients. The agency, police and prosecutors inspected 32 products made by the company and currently sold in pharmacies. They found that a key ingredient advertised for the products, an herb called Cynanchum wilfordii, was not present in 21.

Those products contained a different herb called Cynanchum auriculatum Royle, which is not legally authorized by the government for food or medicine.

Founded in 2001, Natural Endotech was a rising superstar in biotech and the health industry. It sells raw materials mainly extracted from various kinds of herbs to pharmaceutical companies.

In October 2010, the U.S. Food and Drug Administration authorized the company’s herbal products, including those made of Cynanchum wilfordii, as a New Dietary Ingredient. At the time, the company’s founder and CEO, Jae S. Kim, said that he found the herb effective for relieving various symptoms of menopause for middle-aged women.

However, the consumer agency claimed the company used the unauthorized herb Cynanchum auriculatum Royle, which looks similar to Cynanchum wilfordii. But the agency said it could cause harmful side effects, such as liver toxicity, a state of mental collapse, or loss of weight. It is illegal to use the herb in medicine or food.

Immediately after the agency’s announcement, Kim held a press conference refuting its claim. He said the Ministry of Food and Drug Safety conducted an inspection of samples of their products in February and found no problem at the time.

“The agency released erroneous information,” Kim said at the press meeting.

In February, the Food Ministry said it launched an inspection of some of the company’s products following complaints from consumers that they suffered some side effects.

“Last year, we received 301 complaints from consumers about the side effects of medicines made of Cynanchum wilfordii, and many of them were made of the materials of Natural Endotech,” a Food Ministry official told the JoongAng Ilbo. “So we launched an inspection of the company’s factory in Icheon. But at the time, we did not find Cynanchum auriculatum Royle in their samples.”

The Food Ministry again carried out an inspection of the company’s materials and it is expected to announce the outcome this week.

Due to the scandal, Natural Endotech, which once ranked at around ninth among 20 Kosdaq companies in terms of total market capitalization, was pulled off the top 20 list.

On Monday, it ranked 24th on the Kosdaq list, with its capitalization shrinking to about 877.8 billion won from about 1.6 trillion won last Tuesday.

Its stock price, which hovered over 86,000 won per share on Tuesday, was slashed in half to 45,400 won on Monday. The stock value of the company has been falling to the daily limit of 15 percent in the last four consecutive trading days.

The collapse of those shares dragged down prices of Kosdaq-listed companies specializing in health and biotech products. The total market capitalization of major companies in the sector dropped by 2.42 trillion won between Wednesday and Friday.

Market insiders are awaiting the upcoming announcement of the Food Ministry this week.

“Until the outcome of the official investigation is released [by the Food Ministry], the stocks [of Natural Endotech] could be further fluctuating,” said a Samsung Securities report.

Analysts said the incident prompted many retail investors to lose faith in Kosdaq-listed companies, resulting in an overall collapse of the market.

WISEfn Corporation, a market analysis company, lowered its forecast for the total operating profits of 131 promising companies listed on the Kosdaq for the first quarter of this year, to 1.09 trillion won on Monday from 1.24 trillion won on Jan. 27.

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