"Hyundai Pharm, With Zero Treasury Share Cancellations, Ultimately Chooses to Defend Owner's Stake"

Hyundai Pharm has decided to dispose of most of its treasury shares through a share swap with other pharmaceutical companies, which is being analyzed as a strategic move to strengthen the control of the third-generation owner. Previously, Hyundai Pharm was seen as a prime beneficiary of the proposed amendment to the Commercial Act mandating treasury share cancellation, given that its treasury shares accounted for over 18%. However, the company chose to dispose of the shares in a way that revives voting rights, rather than canceling them, disappointing shareholders who had hoped for a cancellation.

According to the Financial Supervisory Service's electronic disclosure system on March 4, Hyundai Pharm announced on February 26 that it would dispose of 4,780,654 treasury shares, equivalent to 14.94% of total shares. The total value of the disposal is approximately 61.2 billion won. Of this amount, 1.5 million shares will be sold to institutional investors via block deal, while the remaining 3.28 million shares will be swapped with other pharmaceutical companies, specifically Shinpoong Pharm, Daehwa Pharm, and Samil Pharm.

원본보기 아이콘

Investor response has been cold, as many had expected treasury share cancellation in line with the government's value-up policies. Hyundai Pharm had consistently purchased treasury shares to stabilize its stock price, accumulating a stake of 18.33%, but has never canceled any of them. From a governance perspective, the decision to dispose of treasury shares is widely criticized as a means for the owner family to defend management control. Currently, the largest shareholder is Chairman Lee Hankoo (17.88%), while CEO Lee Sangjun, who is actually running the company as the third-generation owner, holds only a 4.22% stake.

Treasury shares, which ordinarily have no voting rights, regain them the moment they are transferred to a third party. If the shares had been canceled, the total number of shares outstanding would have decreased, resulting in only a slight increase in CEO Lee Sangjun's shareholding to approximately 5.17%. However, by opting for a share swap with friendly pharmaceutical companies, Hyundai Pharm has secured over 10% in friendly shares. An industry source noted, "For an owner with a low shareholding, canceling treasury shares would directly weaken their control," adding, "This move goes against the intent of the Commercial Act amendment, while securing practical gains."

This is also intertwined with Hyundai Pharm's growing financial burden. As of November last year, Hyundai Pharm’s cash and cash equivalents stood at 2.5 billion won, a sharp decline of about 75% from the previous year's 10.3 billion won. Notably, cash flow from operating activities has been negative for three consecutive years. With rising costs for clinical trials of new drugs and factory expansion, the company chose to make a block deal with institutional investors due to its inability to generate cash from operations.

Hyundai Pharm explained that the purpose of this disposal is to secure funds for expanding its Cheonan plant and for clinical trials of its diabetes drug candidate, HDNO-1605. However, it remains uncertain whether these moves will lead to concrete results in the short term. Currently, Hyundai Pharm relies on existing finished pharmaceutical products such as Tenormin and Levotus for 83.4% of its total sales. Its only proprietary drug pipeline is HDNO-1605, which is in phase 2b clinical trials in Korea. Although HDNO-1605 received phase 2 IND approval from the US Food and Drug Administration (FDA) in 2020, there has been little progress, and the company is now focusing on obtaining domestic approval.

After opting to revive voting rights just before the introduction of new regulations, Hyundai Pharm’s share price has been declining for several consecutive days. The stock, which had been trading in the 13,000 won range, closed at around 10,000 won as of the previous day. Industry observers believe that how the company handles the remaining treasury shares (about 3.4%) will be the final measure of Hyundai Pharm's sincerity in enhancing shareholder value.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.