12 November 2019
Hyundai Life Boat (“HLB” 028300 KOSDAQ)
Current price:139,400 KRW
Target price: 20,000 KRW
HLB’s stock price has soared eight times over the past few months. Investors are piling in the cash, hoping to jump in on the hype that the stock and its promoters are generating.
The reason? A fantasy drug that the company claims will be a market beater for the very potent and dangerous gastric cancer. That alone has seen HLB gain a market capitalization of US$5.75 billion, making it one of the hottest stocks on the KOSDAQ this year.
But the reality is far less rosy – all hype and little substance. The drug Rivoceranib, targeted to be used as a third-line gastric cancer treatment, is not only less effective than existing drugs on the market, it also poses more safety hazards.
1) The drug failed to reach its objective of extending the overall survival rate of patients based on an international Phase III clinical trial. Given that the drug is to be used as a palliative treatment, and not a curative treatment, this result is particularly damning. Why would physicians prescribe the drug if it continues to inflict so much pain without the benefit of extending the patient’s life?
2) Its safety record is also exceedingly poor. More than a quarter of the patients in the Phase III trial dropped out, while 47.6 per cent of them – an unusually high number –experienced serious side effects.
3) Based on the results of just the third-line patients, the drug arm killed faster than placebo.
4) With poor efficiency and a dodgy safety record, HLB is unlikely to get approval for the drug.
5) The market size of Rivoceranib, as a result, is likely to be much smaller than originally posited. We estimate it to be between US$300 million and US$500 million, in the best-case scenario. At worst, it could amount to almost nothing given the presence of more effective drugs in the market.
As such, we believe HLB is worth only a fraction of its current market capitalization. The market is already waking up to the fact that this is a sham company, looking to swindle its investors. It pretends that it has a cure for gastric cancer when it itself is the cancer.
HLB knows that the game is almost up. In a recent shocking press release (link), they decried the “malicious rumours” that are being spread about the company. Quoting Nazi propaganda master Joseph Goebbels – not the best of role models to cite – the company said that “incitement is possible with a single sentence but dozens of documents and evidence are needed to refute it”.
It seems to be suggesting that it is a victim of such said rumors, except that they have been the ones doing a fine job at misleading its investors.
Lies, misdirection and now, Nazism. What’s there not to love about this company?
Someone throw HLB a lifeboat
Up to maybe a year ago, Hyundai Life Boat (“HLB” 028300 KOSDAQ) was a little-known Korean company. Listed on Korea’s small-cap exchange KOSDAQ, most of HLB’s claim to fame most likely came from been being mistaken as part of a larger and more illustrious company, the Hyundai chaebol.
And no, they are not related.
HLB is a small lifeboat and yacht builder that has been suffering terminal decline in its traditional business over the years, drowning in a sea of competition from the aggressive Chinese shipbuilders.
But something changed over the past year or so. Its stock price jumped eight times from 20,000 KRW to 160,000 KRW in just a matter of months. As a result, HLB is one of KOSDAQ’s hottest stocks in 2019, with a market capitalization of US$5.75 billion. It is trading at an incredible 180x LTM sales of just US$30 million.
It’s an amazing story that has the investor hungry for more. Who cares if it’s difficult to justify just how inflated the stock price is? Greed, as Gordon Gecko once proclaimed, is good. That was until he was put into the slammer for making one illegal trade too many.
For HLB’s investors, many of whom are retail investors, borrowing to ride on the meteoric rise of this stock once seemed like a good idea. But they could now be one trade away from seeing all of their hopes come crashing down.
HLB: The lifeboat maker
HLB manufactures and sells various types of lifeboats for marine plants, drill ships, and cruise vessels in South Korea.
HLB’s composite business (lifeboats, yachts, fishing boats, etc) is a declining business. Revenues from that business dropped from a peak of 38 billion won (US$35 million) in 2015 to 27 billion won (US$23 million) at the end of Dec 2018. It is a sunset industry facing steep competition from cheaper manufacturers elsewhere in Asia (China and South East Asia).
Many companies often face a decision when their products hit the late cycle. When it is clear that their products are at the end of the line, it is the duty of the management to innovate, either by branching into a related line of products or to diversify to new areas. There are plenty of examples: Fujitsu did it by adapting their photo technology and applying it to cosmetics.
But there are also many that are looking to take a quick way out. Listed companies sometimes invest in other industries that historically have an outsized or over-optimistic valuation – typically the technology, pharmaceuticals and life sciences sectors. In many cases, these companies are unlikely to have synergies between their old businesses and new ones. But they do it anyway because investors love a new story, a fresh narrative that promises to dramatically transform the company’s fortunes. So they move ahead and burn up resources to capture the moment. But while it may give them a boost, remember that the flame lights up the brightest before it burns out.
In the case of HLB, they have tried many different businesses, from power generation to heavy industries, before finally landing on what seems to be the holy grail: biotechnology.
Overview of HLB’s current subsidiaries
HLB is currently split into three main business units: biotech/pharma, heavy industries, and vessel manufacturing. The bio-tech set of companies make up the biggest highlight in this report because it is clear that investment enthusiasm is greatest on this front.
The company has three biotech/pharma subsidiaries: LSK Biopharma, HLB LifeScience, and Life Liver Co., Ltd.
HLB Lifescience has a biotech arm and a low-growth energy business arm. The bio business consists of Korean-only rights/licenses to two very early stage treatments for cancer for a very small target market in Korea.
Life Liver supplies cell lines to labs, which is a very low-revenue and low-margin business. It is not even close to producing a viable liver product for therapeutic purposes.
LSK Biopharma is HLB’s most promising biotech company out of the three it has bought stakes in. Founded in July 2005, LSK Biopharma is based in Salt Lake City in Utah, USA. HLB has had an ongoing relationship with LSK since its inception. In 2010, HLB bought a majority stake in LSK. Earlier this year, it shelled out US$161 million to merge with LSK, now known as Elevar Therapeutics.
Elevar’s main product is a drug called Rivoceranib, also known as Apatinib – a selective tyrosine kinase inhibitor of VEGFR-2 that is being developed to treat gastric cancer. It is marketed as a third-line treatment for the cancer. This means that it comes in third after two other treatments are administered.
To be certain, Rivoceranib was first developed by Advenchen Laboratories in Southern California under the designation YN968D1. The compound was exclusively licensed to Jiangsu Hengrui in China (2005) and LSK (2008), now named Elevar, for the rest of the world. LSK further licensed the South Korean rights to Bukwang Pharmaceutical Co., LTD.
The drug is currently being developed by Elevar.
Now to set the context: gastric cancer is a growing problem around the world. There are close to a million new cases a year. Survival rates are also low, with five-year survival rates pegged at 20 per cent.
The leading drug in the market for gastric cancer, at least as a second-line treatment, is Ramucirumab (Cyramza), a drug developed by Eli Lilly, a pharmaceutical powerhouse. Cyramza has proven to have successfully increased survival rates of second line gastric cancer patients significantly.
Due to Cyramza’s tremendous success – $821 million in sales globally in 2018, and still growing – HLB’s third-line gastric cancer treatment with Rivoceranib has been positioned to be just as successful, if not more.
HLB has been quick to sell this story, comparing itself to Gilead Sciences, which helped develop Tamiflu. Investors are buying into this story – that the potential of Rivoceranib will herald a wave of success, funds and growth for the company. Hence, the massive surge in the company’s share price.
But while sexy sells – even with a name like Rivoceranib – the truth cuts much deeper. A closer inspection of the drug and its clinical trials shows a different story altogether. We ask three questions that every investor should be asking of HLB. The answers are not pretty.
1) How efficient is the drug?
The company was very eager to show off the positive results of the trial. Of course.
Here’s what they posted on their website:
To the untrained eye, the results seem pretty decent. Overall survival rates for Rivoceranib were higher than all the other drugs. Progression free survival was also higher. The company also highlighted that it had two complete recoveries from its drug. A miracle, twice over!
Except that it isn’t. The reason is simple: you cannot just line the clinical trials of two different drugs side by side and compare them. Any scientist would know that. Even students in elementary school know that to conduct an experiment, certain variables have to be kept the same.
Here’s what medical experts and scientists have to say about comparing trials of different drugs:
“Naïve direct comparison between two drugs refers to an assessment or analysis where clinical trial results for one drug are directly compared with clinical trial results for another drug. There is no attempt to adjust for any discordance in comparators between/among the trials….
…the major limitation of the naïve direct comparison is that it is not possible to determine if any differences noted between the efficacy measures of different drugs can solely be attributable to the drugs themselves. Instead, the differences may reflect differences in other aspects of the various clinical trials, such as populations, comparators and outcomes.”
In other words, to compare results of the trial with other drugs’ trials is either deceitful, or plain stupid. The comparisons used by HLB are not useful, and even counter-productive, because the trials were conducted under different circumstances and the relative results do not matter.
The company willingly and knowingly embarked on this exercise to mislead investors who may not know better. In magic, this is called the art of distraction. A bit of hocus pocus to keep the audience enthralled while the magician’s fingers work furiously behind the veil to pull out the next illusion.
As far as this report card goes, the only way to assess the results is to study the effect of the drug compared to the placebo group. In its international Phase III trial, ANGEL, the primary objective was to verify if the drug boosted the overall survival rate.
The drug had failed. To this end, the median overall survival (mOS) was 5.8 months for the Rivoceranib group versus 5.1 months for the placebo arm, a difference that was statistically non-significant (p=0.485).
This is tremendous and investors must take note of this. The entire trial was to prove whether the drug will help patients survive longer. It showed that the drug could not. The US Food and Drug Administration’s approval primarily hinges on this result. Let that sink in. HLB could not prove that its drug was more effective than a placebo taken by cancer patients.
Given that the drug, as a third-line treatment, is to be used as a palliative treatment, and not a curative treatment, this result is particularly damning. Why would physicians prescribe the drug if it has so many side effects without any promise of extending the patient’s life?
CLSA had an equally negative view. In its note published 3 Oct 2019, it said:
“Still, the failure of ANGEL would give physicians pause when it comes both apatinib and the entire class of VEGFR tkis which also include anlotinib, fruquintinib and lenvatinib in gastric in China. Gastric cancer remains an extremely difficult to treat condition.”
Instead, HLB focused on the other secondary objectives of the trial. In particular, it highlighted the drug’s effect on patients’ progression free survival (PFS). This measures how effective the drug is in stabilising the condition of the patient by stopping the cancer from spreading, and adding to his or her quality of life.
The median progression free survival (mPFS) of the full population (3rd and ≥4th line) was 2.8 months for the Rivoceranib arm versus 1.8 months for the placebo arm (p<0.0001). In short, the benefit was just one month.
The company believes that it can get FDA approval based on the PFS and other secondary results of the trial. This is highly unlikely to happen. It’s like applying for a job as a rocket scientist. Even though you failed your Physics, you instead appeal to the fact that you got Bs for Biology, Literature and History.
Here’s the finishing act: nowhere in its news release did HLB mention it failed its primary objective. It basically sidestepped the most important part of the trial results. Like we said, hocus pocus.
2) How safe is the drug?
It has been well-documented that most cancer treatments have some form of side effects. The question is how serious they can get, and how common they are among patients.
Alarmingly, the safety record for Rivoceranib has been nothing short of poor. Over the multiple Phase II and III clinical trials that it has conducted, safety has consistently come up as a problem.
Take the latest international Phase III international clinical trial. Our researchers prepared the following table to document the side effects. The effects of Rivoceranib is compared against a placebo:
There are a few numbers investors should pay close attention to.
The first is the rate of Treatment Emergent Adverse Event (TEAE). This is defined as “an event that emerges during treatment, having been absent pretreatment, or worsens relative to the pretreatment state”. In short, adverse side effects that occur after the treatment has taken place.
Almost a quarter of all patients discontinued the treatment as a result of TEAEs – significantly higher than the control group. This means that the side effects were so severe that patients opted out rather than continue with the treatment. Just how bad must it have been?
Pay attention also to the rate of hypertension in the clinical trial. Some 34 per cent, or more than a third of patients, had hypertension as a result of the treatment. This was compared to just about 3 per cent in the control group.
Some 29.3 per cent of the patients who took Rivoceranib also found abnormal levels of protein in their urine, compared to just 7.3 per cent in the control group. Similarly, a hand-foot-skin reaction occurred in 26.4 per cent of patients, much higher than the 4 per cent of the control group. To be certain, these are ‘common’ serious side effects. But the incidence of such conditions is elevated when Rivoceranib was used on patients.
In its news release on the results of the drug, the company said that the drug had “manageable side effects,” and sought to play down the seriousness of the side effects:
“Serious side effects (grade 3 or higher, the higher the number of side effects) were within the manageable range of hypertension, 17.9%, amputee syndrome 2.9%, and proteinuria 7.5%, which were associated with drug effects.
This large global clinical trial once again confirmed the safety of Rivoceranib, demonstrating sufficient clinical significance compared to Lonsurf, a previously approved cytotoxic anticancer drug, as the 3rd line for stomach cancer.”
HLB conveniently left out the fact that 23.1 per cent of patients dropped out of the trials due to side effects.
And while it was eager to show off how strongly it performed against its other competitors when it came to survival and recovery rates, it politely – maybe even deviously – declined to compare safety of the drugs. A simple check showed that for Cyramza’s Phase III trial, 25 per cent of the patient group showed hypertension. About 15 per cent of patients showed Grade 3 hypertension. Both these numbers are much lower than Rivoceranib’s results.
Another detail that the company did not disclose is that those in the placebo group had a higher survival rate than the treatment group after 12 months. This suggests that Rivoceranib may be producing long-term harm to its patients.
Dig further back, and the results are strikingly similar.
Data from a Phase II trial from European Society of Medical Oncology (ESMO) published 10 Oct 2016:
Another study in China showed similar results, especially in the high proportion of people who dropped out of the trial:
In short, there are serious concerns about the safety of the drug that HLB has chosen not to surface, or refused to acknowledge. It has even chosen to paint them in a positive light. Spin to win?
3) What is the actual commercial potential of the new drug?
One of the first things that HLB was happy to share is about how Rivoceranib, marketed under the name of Aitan, has been a real mover and shaker in China.
The Chinese government approved the drug in 2014. Since then, Jiangsu Hengrui, which holds the license for distribution in China, has been doing brisk sales. In fact, it claims that sales of the drug has soared past US$250 million in China alone. These are some pretty heavy numbers.
HLB has also repeatedly highlighted that Hengrui’s market cap has soared since the drug was approved for sale in China back in 2014. It is clearly hoping that investors see the parallels.
Again, unfortunately, there isn’t such a story to be told.
First, Aitan is just a small part of Hengrui’s stable of medicines, which stretch out to hundreds of millions of generic medicine tablets a year. HLB only has Rivoceranib.
Second, even if the numbers are accurate – we can’t verify the sales numbers for China – they belong solely to Hengrui. As noted earlier, HLB has the license for the drug outside of China. So while the drug continues to sell well in China, HLB has no share of the revenues.
It is also important to note that physical and racial profiles matter when assessing the efficacy of the drugs. Even if the drug was proven to be well-received by the Chinese, the international market consists of Caucasians, Europeans, different types of Asian profiles, among others. Drugs have different effects on different types of racial profiles. That was why the global ANGEL trial, even if heavily skewed towards North Asians, had to be done. And that Rivoceranib failed in its primary objective makes its commercial viability outside of China ever more questionable.
Third, given the low efficacy of Rivoceranib as shown in ANGEL, it is likely that the best-case scenario is for the drug to become a fourth-line treatment for gastric cancer. But this means the market size is likely to be much smaller than it would be as a third-line treatment.
Take the US, for instance. There are 27,000 patients diagnosed with stomach cancer a year. About half reach fourth-stage treatment. At the rate of US$12,000 per treatment, which is what current drugs in the market cost, the market size is at most US$120 million. Add the richer Europeans and the Japanese, and you might get a market size triple of that, at about US$350 million. That’s hardly anywhere close to the valuations HLB is being measured at.
And take note, this is the best-case scenario, which assumes that the drug has full and direct penetration to all global markets. It also assumes that there are no competing drugs in the market. But reality bites.
There is a drug called Pembrolizumab (Keytruda) that is already approved and its drug provides therapy for third- and fourth-line gastric cancer. It is one of many direct competitors to Rivoceranib and significantly reduces the total addressable market for the drug.
HLB is not the only company that is desperate to save itself.
Another Korean firm, Kolon, a big chemical/textile manufacturing firm, recently ventured into biotech – just like HLB. They bought and renamed TissueGene, and attempted the same trick that HLB is trying to do now. They lied about the effectiveness of one of their drugs, but got punished by the market when they were exposed. Investors quickly caught on. The stock plunged from 50,000 KRW to 8,000 KRW per share within weeks and trading was halted as a result of misrepresentation allegations. Its last trading date was in June 2019.
Where HLB is concerned, there are three questions, two answers, and one simple piece of advice.
Is the drug safe? No.
Is the drug effective? No.
How strong is the commercial viability of the drug? Low to non-existent.
Get out while you still can.
 Karimi P et al. Gastric Cancer: Descriptive Epidemiology, Risk Factors, Screening, and Prevention. Cancer Epidemiol Biomarkers and Prevention. 2014.
 The initial treatment is referred to as first-line treatment or first-line therapy. Your doctor may then suggest a second-line and third-line treatment, also called second-line / third-line therapy, if the first line therapy is not effective. It is a different treatment that is likely to be effective.
 Eli Lilly 2018 Annual Report