[Reporter’s View] Investors’ money, who is it for?

The public is giving the cold shoulder to the South Korean bio companies and their recent investments.

 

A number of bio companies have apparently invested in Optimus fund that caused loss of about 500 billion won from an alleged fraud.

 

And as the public found out about the fraud, the bio companies could not avoid their harsh reproach.

 

Once valued at 5 trillion won, Helixmith came under fire from the investors as it was uncovered to have invested a large sum of over 200 billion won.

 

This is not to criticize a private company investing on a high-risk hedge fund.

 

Like any other individual investors, companies can carry out diverse investment models to multiply their assets.

 

However, the problem is that these companies have injected a part of their investors’ money, received to improve R&D and relevant facility, to the high-risk hedge fund.

 

The criticism on their ‘moral hazard’ would be inevitable, when they technically ‘gambled’ with the shareholders’ money.

 

Most of the listed bio companies source their finance from the stockholders as they increase capital by issuing new stocks.

 

Many of them generate insignificant sales volume, but they raise capital by ten-fold of the sales profit from the shareholders’ investment.

 

For instance, Helixmith’ annual sales profit marked around 4.5 billion won last year, but it offered new stocks worth of total 281.7 billion won to the shareholders last month.

 

Their plan is to secure over 60 times of their annual sales as capital by simply asking for investors’ money.

 

The same company has also received total 300 billion won from increasing paid-in capital twice, each in 2016 and 2019.

 

Superficially, their objective of follow-on offerings to the shareholders is to develop new drug.

 

To let the shareholders to invest the finances for the new drug development, those companies would offer an opportunity to buy new stocks for inexpensive price.

 

But a large-scale paid-in capital increase is not good news for the shareholders.

 

Typically, the value of the stock gets diluted and drops when the rights issue is announced.

 

For the shareholders, who cannot buy new stocks with their tight financial situation, the company’s decision to issue more stock cannot be pleasant.

 

Also, the participating shareholders would have to take in even worse damage, if the stock value falls further after the rights issue.

 

Whenever a company is offering a large-scale rights issue, the company has to report in detail regarding a specific objective of using the injected capital.

 

The companies usually state the additional capital would be used on achieving the company’s vision like in new drug R&D, production facility expansion and debt repayment.

 

A company receiving finances from investors is making a promise with the investors.

 

The investors give their capital to the bio companies, believing that the executives of the companies would reach the vision as proposed.

 

Statistically speaking, not all bio companies would be able to get to where it intended.

 

The South Korean investors have also learned of difficulties the companies have to undergo in recent years.

 

In the end, their hopes and dreams of a successful new drug leveraging the company as a global company lead the investors and the company executives to continue invest in R&D.

 

A company instigating investment by manipulating the investors cannot be tolerated—it would disturb the order in the stock market.

 

We would have to be concerned of certain company executives’ moral hazard influencing the investors’ distrust in the bio industry.