[Inside Chodong] K-Biotech Has No Patient Capital

Korea's Reality Contrasts with China's Biotech Sprint
A Lack of Patient Capital Hampers Late-Stage R&D

"We thought they were chasing us, but then they seemed to be standing beside us, and before we knew it, they had overtaken us."

That was the response from an official in South Korea's biotech industry when asked about the current state of China's biotech sector. The biotech series in our special report, "China Shock: K-Industry on the Brink," published over four days starting October 19, offered a clear picture of this reality. It is remarkable to see a single company develop multiple drug candidates at the same time and secure several technology export deals in just two or three years.

We do not have to follow China's breakneck pace at all costs, nor would that even be possible. What matters is whether we are doing everything we can. From this perspective, one particularly troubling contrast with China is our limited capacity for late-stage development. The more thoroughly companies conduct clinical trials and demonstrate the value of their drug candidates, the better the terms they can secure in technology deals—and the more momentum they can build for developing their next candidates. This creates a virtuous cycle. In reality, however, financial pressures force domestic companies to rush to license out their technologies at relatively low prices during the preclinical stage. About 75% of domestic drug candidates are concentrated in the discovery and preclinical stages, while only around 50 have entered Phase 3 clinical trials. This is one indication of the broader dysfunction.

At the heart of the problem is a mismatch between when investors need to recoup their money and when the value of a drug candidate can be fully validated. Drug development takes many years, sometimes more than a decade, while investment funds such as venture capital firms inevitably face pressure from fund maturity dates. Mergers and acquisitions (M&A) are also not particularly active. Few companies are willing to step forward because it is difficult to assess a candidate's chances of success, and they would also have to shoulder enormous development costs after an acquisition.

As a result, industry officials and experts broadly agree that companies have been unable to diversify their exit routes and have become excessively reliant on initial public offerings (IPOs). There are limits to how long companies that urgently need patient capital, such as biotech ventures, can survive in the technology-based special listing market. Some companies are pushed into side businesses unrelated to their core operations to meet performance requirements, such as revenue, for maintaining their listings. These cases reveal the darker side of this reality. The key, therefore, is to ensure that follow-on funding for drug development continues even when existing investors recoup their investments. To achieve this, we need to consider ways to more actively link exits with new investment.

One possibility is to link existing investors' sales of their shares to new equity investments and co-development agreements by large pharmaceutical companies, while allowing the investment to expand in line with progress in subsequent development. A company could initially acquire a minority stake to limit its exposure, while securing the option to obtain additional shares or technology rights later. A case worth noting is Johnson & Johnson's deal with biotech company Sail Biomedicines last July, which combined an equity investment with an option to acquire the company in the future as part of a co-development agreement. Similar deals are also taking place in Europe and Japan.

Of course, the existence of such options is one thing; getting companies to actively invest is another. The market remains limited in size, and capital is scarce. This is why the government needs to provide carefully tailored support that accounts for the biotech industry's unique characteristics, including tax incentives for strategic equity investments and co-development, as well as risk-sharing through policy financing. We live in an era when the biotech industry is regarded as a strategic national security asset. Yet 78% of all drug candidates in South Korea are held by cash-strapped venture companies, leaving the industry on precarious footing. It will be difficult to address this reality if the timeline for drug development remains dictated by the timeline for recouping investments.

This content was produced with the assistance of AI translation services.