PharmAbcine, CB Investors Smile with No Warrants... Will a Flood of Shares Follow?

[Asia Economy Reporter Jang Hyowon] Bio new drug research and development company PharmAbcine has decided on a free capital increase, providing relief to convertible bond (CB) investors. This is because the stock price, which was lower than the conversion price, quickly surpassed the conversion price due to the free capital increase. However, concerns have been raised that if the 100 billion KRW scale CB is converted into shares, about 24% of the total shares could flood the market.

◆ 1-for-1 Free Capital Increase... Increased Liquidity Drives Stock Price Up

According to the Financial Supervisory Service's electronic disclosure on the 17th, PharmAbcine decided on a 1-for-1 free capital increase on the 15th. As of July 1, shareholders holding stocks will be allocated one additional share per share held. Upon completion of the free capital increase, the current total shares of 6,910,809 will double to 13,821,618 shares.

A free capital increase is an accounting process that transfers surplus capital to the capital account, so there is no actual change in total capital. However, since the number of circulating shares increases and the price per share decreases after the free capital increase, there is a temporary illusionary effect of the stock price rising.

Additionally, transferring surplus capital to capital can be interpreted as the company having made significant profits. However, in PharmAbcine's case, as a research-focused antibody therapeutic development company, it recorded zero sales for two consecutive years after being listed on KOSDAQ in 2018 through a technology special case.

As of the end of Q1 this year, accumulated deficits stood at 52.7 billion KRW. PharmAbcine is not conducting the free capital increase with earned profits but is transferring the capital surplus generated from previous stock issuances to the capital account.

An industry insider said, “A free capital increase increases stock liquidity and enhances the company's image. While the stock price may rise in the short term, if the company's fundamentals do not support it, the stock price usually returns to its original state.”

◆ Stock Price Surpasses Conversion Price Due to Free Capital Increase... 24% Stock Bomb Awaits

The biggest beneficiaries of this free capital increase are institutions that purchased PharmAbcine's CB last year.

On May 31 last year, PharmAbcine issued the first tranche of CB worth 100 billion KRW. With a zero percent coupon and maturity interest rate, it is understood that institutions invested with conversion in mind. The investors include Kiwoom Securities, KB-Brain KOSDAQ Scale-up New Technology Business Investment Association, NH-Aju KOSDAQ Scale-up Fund, Andamezanin Fund, among others.

The initial conversion price of this CB was 67,389 KRW per share. However, as PharmAbcine's stock price continued to fall, the conversion price was adjusted to 47,173 KRW in September last year. This CB includes a condition that allows the conversion price to be adjusted down to 70% of the initial conversion price if the stock price falls. 47,173 KRW is 70% of the initial conversion price.

This CB could be converted into shares starting from the 31st of last month, one year after issuance. However, at that time, PharmAbcine's stock price was in the 33,000 KRW range, meaning converting to shares would result in a 30% loss. Even until the trading day before the free capital increase decision, the stock price was in the 43,000 KRW range, far below the conversion price.

However, immediately after announcing the free capital increase on the 15th, PharmAbcine's stock price hit the daily upper limit during trading. For CB investors, assets that were incurring losses suddenly generated profits in the 20% range.

If the 100 billion KRW scale CB is converted into shares, it amounts to 2,119,856 shares before the free capital increase. This volume corresponds to 23.5% of the total issued shares that could be released into the market.

Regarding this, a PharmAbcine official said, “The free capital increase was conducted to raise the undervalued corporate value for long-term shareholders,” and added, “We expect many positive developments ahead, so the stock price is anticipated to rise further.”

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