HLB Pharmaceutical Executives Take Out Series of Stock-Collateralized Loans Amid FDA Setback, Defending Liquidity

HLB Life Science recently maintained a 24.31% stake in HLB Pharmaceutical, or 8,331,408 shares, while HLB Pharmaceutical CEO Park Jae-hyung entered into new and extended stock-collateralized loan agreements with several securities firms, according to filings with the Financial Supervisory Service’s Electronic Disclosure System (DART). The filing has drawn attention because it highlights not simply a change in ownership but the group-wide liquidity pressure triggered by delays in FDA approval.

The key point in the amended report is the increase in the number of shares pledged as collateral. The number of shares covered by major agreements rose to 3,675,682 shares, or 10.72%, from 3,608,476 shares, or 10.53%, in the previous report. CEO Park extended two existing collateralized loans with Korea Investment & Securities—38,521 shares and 300 million won, and 25,707 shares and 200 million won—and also entered into new stock-collateralized loan agreements covering 66,010 shares and 250 million won with Yuanta Securities and 117,206 shares and 500 million won with IBK Securities.

The uncertainty surrounding HLB Group’s renewed attempt to obtain FDA approval is behind the expansion of its collateralized borrowing. HLB Group has been pursuing U.S. FDA approval for the liver cancer drug rivoceranib, but its stock price came under significant pressure after the group received a third complete response letter (CRL) because of manufacturing facility issues at its partner, China’s Hengrui Pharmaceutical. The fallout also dealt a direct blow to HLB Pharmaceutical’s financing plans.

HLB Pharmaceutical recently reduced the size of its rights offering by approximately 49%, from the original 120 billion won to 60.8 billion won. Its largest shareholder, HLB Life Science, also decided to subscribe for only half of its allocated shares because of insufficient liquidity. Despite the funding being nearly halved, HLB Pharmaceutical kept its budget for construction of a new plant in Hyangnam unchanged instead of cutting its R&D budget. This suggests that the company has prioritized building cGMP-grade production infrastructure to prepare for future global demand for rivoceranib and other products.

In July, HLB Life Science entered into an 8.4 billion won stock-collateralized loan agreement with Korea Investment & Securities, pledging 3,428,238 shares as collateral, with a maintenance margin ratio of 250%. The concern is a further decline in the stock price. If the ratio falls below the minimum maintenance level, the securities firm may forcibly sell the collateralized shares on the market, triggering a forced liquidation and potentially creating a vicious cycle of a sharp stock-price decline. The Financial Supervisory Service of Korea has also officially warned that “stock-collateralized loans can trigger forced liquidation during a sharp drop in stock prices and cause massive losses.”

Industry experts view this structure as a potential overhang risk and a weakness in corporate governance. In a parent-subsidiary ownership structure, executives’ use of their shares as collateral for large loans is a pattern frequently observed among South Korean companies and is also an area to which foreign investors are particularly sensitive.

In the filing, HLB Life Science said that, as HLB Pharmaceutical’s largest shareholder, it plans to exercise influence over management, while adding that it has no specific plans yet regarding the appointment or dismissal of directors. Based on voting shares, its stake is 6,856,491 shares, or 20.90%. As the collateral ratio rises, the costs and risks of maintaining control increase together. Ultimately, the resubmission of rivoceranib’s new drug application (NDA) to the FDA and the outcome of the final approval process will be the key variables in resolving these financial risks. The possibility of renewed efforts to secure approval has reopened after HLB’s U.S. subsidiary, Elevar Therapeutics, was recently notified by the FDA that its manufacturing facility had received a relatively minor Voluntary Action Indicated (VAI) classification.