Biotech’s moral hazard

Hanmi Pharmaceutical was the poster child for the Korean pharmaceutical and bioengineering industry. Its decades of commitment to research, development and investment last year bore fruit. It landed several milestone licensing deals valued at over 7 trillion won ($6.2 billion). Its stock price jumped nearly ten-fold over a year. Startups in the bio sector aspired to become the next Hanmi. The company, however, has recently been accused of tardy disclosures and insider trading. Its fall from grace has several implications.

First of all, it underscored moral hazard in the pharmaceutical and bioengineering sector. Company chairman Lim Sung-ki is an expert in stock trading. He is among a few corporate owners that keep close watch over the company’s equity assets. In the 1990s, he gave out shares to employees as bonuses with the aim to protecting management rights. He established a holding entity and strengthened ownership through cross-affiliate equity investment. He handed down millions of dollars worth of shares to his seven underage grandchildren. His close high-school friend Shin Dong-kook, chief executive of Hanyang Precision, became a billionaire all thanks to Lim and Hanmi stock. Two years ago, he bought shares in Hanmi Pharmaceutical and Hanmi Science, whose value jumped four to 10 times over the years to make him sit on riches of over 1 trillion won.

Hanmi Pharmaceutical shared information about the collapse of its exclusive partnership in a $730 million prospective drug deal with Boehringer Ingelheim 29 minutes after the market opened on the following day. In the first half hour, big hands were tipped off in time to dump 50,000 shares, worth 30 billion won. The short sales in Hanmi shares were 10 times the daily average of 4,800 shares.

Short-selling is an investment strategy to borrow shares on the bet that their prices will fall and can bring profit when they are bought back at a lower price. The stock valued at 650,000 won sank to 420,000 won in a week. Short-sellers reaped 10 billion won in a week. In the money game, if someone wins big, someone else loses big. In the stock market, the losers are often retail investors. Short-selling strategy is off limits to retail investors. They are threatening to take class action.

Hanmi claims it was an accident, but the market is unconvinced. A stock, particularly in the pharmaceutical and bio category, hinges on disclosures. It is an irresponsible response coming from a company that has been through a lot since its 1973 founding. A public listing is a license bestowed on a company. A heavyweight company should have been more prudent.

Another problem is rashness in investment in the bio sector. The biotech industry should be an investment with a long-term perspective. It is like a pine tree. It usually has to wait more than a decade to bear fruit and at least a quarter of a century for a full harvest. Top U.S. biotechnology stocks like Celgene and Regeneron Pharmaceuticals respectively hit $150 and $579 last year, but they hovered at $10 to $30 for two decades after they went public. Amgen stock, which was listed in 1984, gained 1,500 times over the last 30 years. Celgene jumped 500 times since it went public in 1990. But there were more that went down the drain.

The Korean biotechnology industry is in a fledgling stage. Seeds that were planted in the late 1990s are just beginning to sprout. Companies like Celltrion, Macrogen and Medipost are starting to make money. Talents that mostly went to medical or pharmaceutical schools are venturing into the bioengineering field.

In the next decade or so, the industry may be ready for a harvest. Biotech grows on capital. It needs to be fed with millions and billions of dollars. U.S. regulators allow biotech companies with credentials to list on the stock exchanges even though they lack a proven sales record.

The industry can only grow when backed by a market that invests well. But the Korean market is not like that. It is impatient. The market shook on unpleasant news about Hanmi and the entire category suffered. There is no future in biotech in such a habitat.

Then there is the problem with the National Pension Service. It is the big fish in the market with a capital fund of 500 trillion won. Its investments can determine a category. The bellwether institutional player dumped biotech shares this year. It lent 1.2 million pharmaceutical and biotech shares for short-sales over the last three years. The bio market has shriveled more. The NPS earned a mere 6.5 billion won for lending the shares. Even the big fish cannot survive if the pond dries up.

JoongAng Ilbo, Oct. 13, Page 34

*The author is an editorial writer of the JoongAng Ilbo.

Yi Jung-jae