[Reporter's View] Pharma bio stocks shunned for good reason

Why individual investors stay away from pharma bio stocks

The sarcastic comment that “escaping from the KOSPI (Korean stock market) is a matter of intelligence” has become a trend for some time.

 

Although the so-called “Korea discount” is not new, the distrust of the Korean stock market among individual investors has been rising recently.

 

Pharmaceutical, biotech, and healthcare stocks are no exception.

 

In fact, compared to other sectors, pharma bio, and healthcare stocks are even more shunned by these individual investors.

 

According to the Korea Exchange, individual investors sold more than KRW 1.5 trillion worth of pharma bio and healthcare stocks last year.

 

This leaves a bitter aftertaste, considering how these individual investors made net purchases of more than KRW 1 trillion in the overall securities market and the KOSDAQ market.

 

Many of the largest stocks were shunned by individual investors.

 

Individual investors sold more than KRW 1 trillion worth of Samsung Biologics shares alone.

 

The same investors sold Alteogen and Celltrion stocks worth KRW 800 billion, and SK Biopharm, HLB, and GC Biopharma stocks worth KRW 100 billion.

 

This is a large-scale disposal of stocks of pharma and biotech companies ranking 1-2 in market capitalization in the securities and KOSDAQ market.

 

Various reasons have been pointed to as the cause of this massive sellout.

 

Some analysts believe that the expanding global economic uncertainty has greatly dampened interest in pharma bio stocks that require long-term investment, while others say it is due to the lack of tangible results such as global drug approvals.

 

In addition, the “Korea discount” has also been cited as a factor.

 

Individual investors complain about insufficient shareholder returns, poor profitability and growth, weak corporate governance, and lack of transparency in accounting.

 

While the Korea discount is not limited to pharma and biotech companies, it is argued that weak corporate governance leads to a lower valuation of pharma and biotech companies.

 

In fact, domestic pharmaceutical bio companies are regarded to be more strongly influenced by their founders and owners.

 

Major decisions are often made by the owners rather than their managers.

 

Outside directors only act as yes-men, tending to the needs of owners.

 

There are no checks and balances.

 

Decisions are made against the interests of shareholders.

 

Gimmicks abound.

 

In the past year alone, dozens of pharma and biotech companies have engaged in so-called “owl disclosure”.

 

They tried to divert investors' attention by disclosing bad information after the market closed.

 

There were also cases of “trick block deals” by key executives.

 

Seven executives and major shareholders of a medical AI company sold shares worth KRW 4.99 billion late last year.

 

Controversy arose over the fact that they sold less than the KRW 5 billion per person limit to avoid disclosing block trades (large after-hours transactions) in advance.

 

Disclosures and press releases that inflate or distort clinical results also continue to arise.

 

Recently, as licensing-out deals were favorable, there have been many cases where the companies inflated the overall contract’s worth instead of disclosing the upfront payment amount.

 

There are also many cases of accounting irregularities and “split listings” that violate the rights of existing shareholders.

 

Such maneuvering and misbehavior of some companies have led to a loss of trust in the industry as a whole.

 

Many pharma and biotech companies plan to pay cash and stock dividends this year as well.

 

Many companies are expected to increase their dividends year-on-year.

 

Many are reportedly planning dividends worth hundreds of billions of won.

 

There are also more cases of free capital increase, stock buybacks, and stock burning.

 

However, some companies' efforts to increase shareholder value are not enough.

 

The entire pharma and biotech industry needs to rebuild trust from the ground up to win back the hearts of individual investors.