South Korean pharmaceutical and biotech companies, facing financial shortfalls, are turning to rights offerings after failing to attract mezzanine investors due to institutional reluctance, amidst a backdrop of market mistrust and recent stock price hikes.
Mezzanine financing is a method that combines both debt and equity financing. In case of default, the lender is given the right to convert to an equity interest in the company. This is commonly achieved through the use of convertible bonds (CB) or bonds with warrants (BW).
According to the Financial Supervisory Service’s data, several major biotech companies in S. Korea, including SillaJen, HLB Life Science, and Aprogen Biologics, are currently conducting rights offerings followed by public offerings of unclaimed stocks. This method of fundraising initially offers subscription rights to existing shareholders and if there is a shortfall, the remaining shares are offered to general investors.
Pharmaceutical and biotech companies listed on the stock market in S. Korea have mainly raised operational funds through issuing mezzanine financing.
During the COVID-19 pandemic, there was a heightened interest in the Korean biotech industry, and many institutional investors were willing to invest in biotech technologies. As a result, fundraising was not difficult back then.
However, the issue arises as the repayment date for previously issued mezzanine financing approaches, yet very few companies have achieved success and are able to repay their loans.
According to a financial investment industry expert, since the start of the year, several biotech companies have been seeking mezzanine investment for refinancing. However, institutional investors have been hesitant to accept their offers, despite the favorable market conditions for biotech companies. Consequently, many of these companies have opted for rights offerings in collaboration with their lead managers, after failing to secure investment through IR.
The background to the failure to attract new investors is rooted in mistrust towards biotech companies, which are often associated with trading suspensions and delisting. Companies like NKMAX, Well Biotec, New G Lab Pharma, GenNBio, Cellivery, Canaria Bio, Sejong Medical, and Cheil Bio are facing the risk of trading suspension after receiving a ‘Disclaimer of opinion’ from their auditors this year.
Furthermore, the recent rise in stock prices of pharmaceutical and biotech companies has made institutional investors hesitant to invest in mezzanine financing. Investing in convertible bonds (CBs) requires an assessment that the current stock price will continue to rise. However, many institutions have presumed that the prices have already peaked.
On the other hand, conducting a rights offering at higher stock prices allows companies to raise more funds by issuing fewer shares, which is advantageous for the companies. As the audit report submission season comes to an end, pharmaceutical and biotech companies that are short on funds are expected to actively seek capital fundraising.
