The stock market regulator granted Oscotech to become the third KOSDAQ-listed biotech company to benefit from an exception policy that supports continued research and development for new drugs.
The system clears of uncertainties over the company’s risk being designated as issues for administration, but biotech industry officials said they were still unhappy about the local authorities’ regulation.
Oscotech is the original developer of lazertinib, a new drug candidate to treat non-small cell lung cancer (NSCLC). The company out-licensed the substance in the pre-clinical stage to Yuhan Corp. in August 2015.
In November last year, Yuhan licensed it out to Janssen for 1.5 trillion won.
The experimental drug recently demonstrated encouraging results in the phase 1/2 trial, becoming the only candidate to compete against AstraZeneca’s Tagrisso.
With lazertinib’s excellent performance, Oscotech earned recognition in technological excellence. However, it was not free from the local accounting rules.
The company’s balance sheet had to reflect the KRX’ latest accounting guidelines for R&D last year, and the revised balance sheet generated operating losses for three consecutive years from 2015 to 2017.
As Yuhan made some of the upfront payment under the licensing deal last year, Oscotech was able to turn around in 2018.
Despite turning to black last year, the company applied for the exception policy to get rid of any risk in case it turns to red. On Monday, the KRX said the firm was eligible for the policy.
Earlier, the regulator named CHA Biotech and Medipost to be applied by the exception policy in February and March, respectively. Under the policy, CHA Biotech, Medipost, and Oscotech are exempt from issues for administration caused by operating losses until 2022.
The exception policy on KOSDAQ-listed biotech and pharmaceutical firms came as the KRX’ measure to alleviate the negative impact of the regulator’s changing of accounting rules on R&D.
The revised rules forced pharmaceutical and biotech firms to report R&D expenses as costs except for expenses of phase-3 trials. The decision led many firms to generate operating losses.
In particular, biotech and pharmaceutical firms on KOSDAQ that were listed under the ordinary regulation, not the technology exception policy, were highly likely to be designated as issues for administration.
Not all drugmakers and biotech firms on KOSDAQ are eligible for the exception policy. The eligible ones should meet all of the following requirements: it should revise audit reports by correcting R&D accounting; its R&D should account for over 5 percent of sales or exceeds 3 billion won in the latest business year; it should score higher than BBB in technology evaluation; its market cap should be more than 100 billion won; it has to have over 25 billion won in equity capital in the latest business year; and should have passed since the company’s initial public offering, for at least one year.
The financial authorities regard the evaluation of technology as particularly important, making sure that only companies with a certain level of technological expertise can be designated as an exception.
“Biotech companies tend to suffer large fluctuations in stock prices whenever they announce earnings because of the fear that they could be designated as issues for administration. However, the exception policy could clear such uncertainty,” an official at a biotech firm said.
The exception policy also allows companies to keep investing in R&D, even it records R&D expenses as costs. However, critics said the regulator should start discussing accounting guidelines exclusively for biotech businesses, as the exception policy was an additional measure to absorb the shock from the latest R&D accounting rules.
It usually takes more than a decade for R&D to turn into a marketable drug, and the market value of a drug is different depending on the disease and the drug’s mechanism. The authorities should consider such characteristics of the biotech industry, critics said.
“The exception policy helps address uncertainties about biotech firms, but it does not support businesses directly,” an official in the biotech industry said. “If the government is willing to nurture biotech for future growth, it should do away with the traditional manufacturing-based accounting standards and make guidelines customized for biotech businesses.”
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