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NKGen’s Volatility Tied to South Korea

Dr. Paul Song, CEO, NKGen Biotech

The stock of NKGen Biotech Inc., a Santa Ana-based clinical stage company developing “natural killer” technology to battle cancer, has been on a wild ride since going public last year.

After going public last October via a reverse merger with a SPAC, its shares reached as high as $6.70 a share, then the stock gradually fell as low as 80 cents (Nasdaq: NKGN).

Then on March 6, it soared 377% to as high as $4.06 in intraday trading, before ending the day at $1.86. The volume of 107 million shares was 25 times the daily average. It only has 25 million shares outstanding. Company officials were initially stumped as there was no news that day.

It turns out the share volatility was related to an external factor in South Korea where the founder and majority shareholder of NKGen had a margin call on a different investment, according to NKGen Chairman and Chief Executive Paul Song. South Korean investors suspected there might be problems with NKGen as well and began to short the shares.

“That caused the stock to plummet,” Song said. “We found a lot of naked shorting going on.”

However, then came a short squeeze, where investors who are shorting stock, i.e. betting it will continue to fall, scrambled to get out of their positions.

“The reality is we don’t have a lot of float—we are susceptible to these price swings,” he said. “All we can control is continuing to meet our clinical goals.”

At press time, the shares traded at $1.43 and a $36 million market cap.

Progress

The share volatility has hidden what NKGen is touting as progress.

On May 20, the company said it was cleared by its Internal Review Board to start its Phase 2 clinical trial for its cell therapy called SNK01 to treat Alzheimer’s disease. It said the Phase 1 study demonstrated that in only four doses that SNK01 was very safe and 90% of patients demonstrated improvement or maintained stable cognitive function.

“We are seeing remarkable preliminary clinical benefit in all patients without treatment-related adverse events, including apparent improvements in cognitive function, increases in daily living activities and overall quality of life,” said Dr. Jesse Carr, the medical director of Behavioral Research Specialists LLC in Glendale, who is independently overseeing the trial site.

“I look forward to the potential that this novel drug candidate holds as we continue to progress the trial.”

The second stage will assess efficacy and further safety of SNK01 in 30 patients with Alzheimer’s disease using a randomized, double-blind design where 20 will receive the medication while 10 will get a placebo.

Song said most other trials are for mild forms of Alzheimer’s.

“Anyone with more advanced stages is given up on,” he said. “We’re targeting a more advanced stage.

“We expect to see real difference before the end of the year. I’m very optimistic based on the patients treated to date. We are seeing patients who are improving dramatically.”

Natural Killers

The company’s made presentations such as at the 12th annual Alzheimer’s & Parkinson’s Drug Development Summit in Boston in April and at the Tau2024 Global Conference in Washington, D.C in May.

“Natural killer” cells are part of the human innate immune response system that can selectively identify and destroy abnormal or diseased cells, the company said.

Unlike cells of the human adaptive immune response system, such as T cells, NK cells do not require prior sensitization or co-stimulation for activity, which is why they are referred to as so-called “natural killers.”

This property allows NK cells to quickly mount an immune response within the human body, the company says. By contrast, it may take a week or more for T cells to expand to numbers that are meaningful enough to mount an effective immune response against a new antigen, NKGen says.

NKGen says it’s developed an “innovative manufacturing process” for NK cells that addresses several factors that have limited its potential such as an ability to scale and off-the-shelf therapies. In Santa Ana, it built a 25,000-square-foot facility and employs 57 companywide.

Founder’s 50%

NKGen founder Sangwoo Park has a long history in South Korean biopharmaceuticals with a variety of firms. In 2017, he established a subsidiary called NKMax America with headquarters in Irvine and a corporate investment of $35 million. In 2021, NKMax America changed its name to NKGen Biotech.

After the short squeeze in March, Park resigned as NKGen chairman while staying on the board and Song became chairman. At one time, Park owned about 50% of NKGen’s common stock, according to the proxy. A spokesman said he now owns only a few shares.

In April, NKGen raised $5 million that Song considers a bridge loan.

“We’ll be announcing additional raising that is significantly more than that,” Song said.

The stock price remains an issue. On March 11, Nasdaq notified the company that its market cap fell below $50 million in the last 30 consecutive business days required for a listing on the Nasdaq Global Market. Hence, Nasdaq is giving the company 180 calendar days, until Sept. 9, to regain compliance.

Song says he doesn’t spend much time analyzing why the stock is so volatile.

“Once we show the readout on what we can do, it will sort itself out.”

The Naked Shorts

“Naked shorting” is a controversial tactic where traders will sell shares in an asset without borrowing them. While technically illegal in the U.S., it still occurs because of loopholes among jurisdictions.

Naked short selling, which could lead to unlimited losses, is a “high-risk and ethically dubious financial practice,” according to the Investopedia webpage, which gave the following example:

“Suppose you sell short 1000 shares in Company A. You haven’t borrowed the shares. Still, you’re betting on a rapid downturn in the stock price for Company A, which makes this not a problem—the price going down should mean there are many sellers looking to get out of their positions.

“Just before the deadline to deliver the shares, the price moves downward, and you close out the short sale for 1000 shares at the lower price. You’ve essentially bet you could square up for the shares you sold that you didn’t possess.

“However, if the market moved the other way, you’d be in a big hole trying to purchase 1000 shares of a stock at a great loss, and the shares might not even be available if there are problems in liquidity.

“Short selling in general can create declines in a company’s stock price, affecting its ability to raise capital. It can also affect the liquidity of the security. When a share isn’t readily available, naked short selling gives you a shortcut; you can participate in the market even though you didn’t borrow the share. This could create false liquidity readings, which could distort the share price.

“A short squeeze occurs when the price of an asset, typically a stock, rises a lot, forcing traders who had bet against it to buy [more shares] to forestall even greater losses. These purchases could drive the asset’s price up further, creating a feedback loop that could result in dramatic price increases. This is believed to have occurred during the GameStop phenomenon of 2021.”

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Sonia Chung
Sonia Chung
Sonia Chung joined the Orange County Business Journal in 2021 as their Marketing Creative Director. In her role she creates all visual content as it relates to the marketing needs for the sales and events teams. Her responsibilities include the creation of marketing materials for six annual corporate events, weekly print advertisements, sales flyers in correspondence to the editorial calendar, social media graphics, PowerPoint presentation decks, e-blasts, and maintains the online presence for Orange County Business Journal’s corporate events.
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