[Reporter’s View] Tighter disclosure rules stall biotech innovation

Korea's financial regulators have once again moved to tighten disclosure requirements for the pharmaceutical and biotech sector. The latest measures require companies to provide more detailed justification for valuations during initial public offerings (IPOs) and disclose more specific terms of technology licensing agreements. The stated goal is to reduce information asymmetry and strengthen investor protection.

The government’s policy objective of improving disclosure transparency is well-founded. Confidence in capital markets begins with adequate disclosure. Given past cases in which clinical results or licensing deals were overstated, or public disclosures conflicted with media reports, specific standards and guidelines are a welcome development.

The problem lies in the policy's overall direction. Recent regulatory reforms affecting the pharmaceutical and biotech industry have focused almost exclusively on investor protection and tighter oversight. Authorities have raised participation requirements for institutional investors involved in IPO pricing and expanded mandatory lock-up periods for allocated shares. They have now gone even further by strengthening disclosure obligations related to corporate valuations and research and development achievements.

In contrast, little progress has been made in expanding exit opportunities for investors. For Korean biotech startups and their investors, an IPO remains virtually the only viable exit strategy. Because the mergers and acquisitions (M&A) market remains underdeveloped, opportunities to recover investments through corporate sales or stake disposals are limited. This is why a significant number of biotech ventures continue to rely almost exclusively on public listings, regardless of their stage of development or market conditions.

Yet there has been little meaningful policy effort to address this structural issue. While IPO rules, disclosure requirements and listing regulations continue to become more stringent, few initiatives have been introduced to promote M&A activity or encourage corporate acquisitions through government incentives. In effect, policymakers are raising the bar for going public without preparing other exit routes for investors.

When exits are blocked, venture capital cannot get back its investments from existing funds, making it difficult to raise new funds. As investment capital dries up, early-stage biotech startups are among the first to feel the impact. Even with technological capabilities, an increasing number of companies have no choice but to delay development schedules or halt pipelines because they fail to secure the funds necessary for entering clinical trials and conducting subsequent research and development.

Meanwhile, companies that have lost their competitiveness often remain in the market instead of being consolidated through acquisitions or restructuring, surviving on government subsidies or repeated equity offerings and convertible bond issuances. As capital and talent remain tied up in underperforming companies, funding fails to reach more promising innovators. Ultimately, innovative companies lose growth opportunities, while so-called "zombie biotechs" remain in the market.

Investor protection is a fundamental principle of any capital market. But a market that focuses solely on protection without providing viable exit opportunities cannot remain sustainable. It is time for policymakers to shift their focus beyond ‘how companies should be listed and regulated’ to ‘how investments can be exited and recycled into innovation.’ The government should introduce tax incentives and expand policy financing that reduce the burden of corporate acquisitions, and create diverse exit channels such as M&A and secondary share sales. Only then can recovered capital flow back into innovative companies, creating a sustainable virtuous cycle for Korea's biotech ecosystem.