Korea Investment & Securities said that it expects the investment sentiment for the local biopharmaceutical sector would shrink even further, as doubts about their ability to develop new drugs have come to light.

The brokerage house also noted that investors would intensify efforts to “distinguish gems from pebbles” among biopharmaceutical stocks.

“The recent developments, including the regulatory agency revoking Kolon Life Science’s license for Invossa scandal, Janssen’s nixing deal with Hanmi over antidiabetic obesity drug, and the setback of HLB’s global phase 3 trial of rivoceranib, have shown the current status of Korea’s pharmaceutical industry,” said Jin Hong-gook, an analyst at Korea Investment & Securities.

The analyst pointed out that such a defeat is not something that the nation can recover with just licensing out technologies or with the government’s policy to nurture the healthcare industry, and exposed a fundamental problem facing the domestic biopharmaceutical industry.

So far, about 20 products have passed through the U.S. Food and Drug Administration (FDA)’s phase 3 clinical trial, and most of the products are limited to categories such as antibiotics and biosimilars.

“We expect that the investor confidence will recover only when Korean firms prove their ability to develop global new drugs,” Jin said. “Therefore, the roles of the companies planning to announce phase 3 clinical trial results, such as Mezzion, Helixmith, and Sillajen, have become more important.”

In particular, the results of Helixmith’s gene therapy VM202, which is scheduled to be released in September, will become the turning point for Korean companies to prove their ability to develop global new drugs, he added.

However, Jin stressed that even if investor sentiment improves thanks to the clinical success of these companies, investors will continue intensifying their efforts to distinguish between good and bad makers, and such a trend will lead to many changes in investment practices in the biopharmaceutical sector.

“Investors will become more concerned about the commercializing possibility of the drug and the actual revenue generation after approval,” Jin said. “The investment strategy will also become more conservative and realistic.”

Also, discounts will be applied to pharmaceutical companies that over-execute R&D expenses with investors focusing more on export companies armed with price competitiveness, he added.