Samsung BioLogics, a contract manufacturer of biologic drugs under Samsung Group, has denied accusations that it engaged in fraudulent accounting practices to boost its market valuation in seeking a public listing on South Korea’s main bourse Kospi last year.
The move came after Rep. Sim Sang-jeung, chairwoman of the minor opposition Justice Party and local civic group People’s Solidarity for Participatory Democracy questioned accounting methods that led to a sudden rise in Samsung BioLogics’ net profit in 2015.
Samsung BioLogics, which has remained unprofitable since its foundation in 2011, suddenly reported a net profit of 1.9 trillion won ($1.66 billion) in 2015. The new influx of profit had been generated by a revaluation of its stake in its subsidiary Samsung Bioepis.
BioLogics explained its stake ownership was calculated into its net profit as a one-time event after Bioepis’ status changed from a subsidiary to an affiliate under the International Financial Reporting Standards adopted by Korea.
A company is considered a subsidiary if the parent company possesses a majority stake in the firm, and an affiliate or associate if it holds a minority stake.
Samsung Bioepis is a joint venture between Samsung BioLogics (91.2 percent) and US-based Biogen (8.8 percent). Under their joint venture agreement, Biogen can exercise a call option effective until the end of 2018 to expand its stake in Bioepis to up to 49.9 percent.
Bioepis took on affiliate status after it underwent an audit to determine its market value and the costs that BioLogics would have to shoulder in case Biogen exercised its call option.
The audit awarded Bioepis a valuation of 5.27 trillion won, based on an improved outlook for the firm’s future profitability following the sales approval of its biosimilar drugs in Europe and Korea.
The audit also concluded that the call option would cause a debt of 1.82 trillion won for BioLogics, which was reflected into the value of its stake in Bioepis which fell to 2.98 trillion won, BioLogics said.
According to BioLogics, the rise in Bioepis’ market value raised the weight and likelihood of Biogen’s call option, which when exercised would weaken BioLogics’ ownership over Bioepis. It was thereby under such circumstances that Bioepis took on affiliate status.
Samsung BioLogics’ net profit reported in 2015, hence, was calculated based on the change in its relationship to Samsung Bioepis, the company said. From 2016, Bioepis’ performance is no longer included in BioLogics’ accounting records.
Rep. Sim and the PSPD took issue with this particular accounting method, saying it differs from that of Biogen which has not calculated its call option -- which it has yet to exercise -- when considering its stake in Bioepis.
Samsung BioLogics credited this difference to varying accounting principles adopted by each company. While Biogen follows the US GAAP accounting standard adopted by the US Securities and Exchange Commission, BioLogics follows IFRS regulations.
The Justice Party chairwoman and the PSPD also suggested problems with the calculation used to arrive at a multitrillion won evaluation for Bioepis, questioning its profitability outlook over the next five years.
The market values of unlisted companies such as Samsung Bioepis are set by accounting firms based on projections of their future profitability. According to the IFRS regulations, this projection would be based on a maximum five year time frame, unless there are “proper reasons” dictating otherwise.
The accounting firms had reportedly based its valuation of Bioepis based on a longer projection time frame of around 20 years, in consideration of the slow pace of new drug development and the pharmaceutical industry.
“(Deloitte) Anjin determined Samsung Bioepis’ valuation of 5.27 trillion won based on Samsung Bioepis’ projections for the revenue and cash flow of its biosimilar drugs, their probability for success and the related risks,” Samsung BioLogics said.
Samsung BioLogics further argued that its “one-time” net profit generated by its stake in Bioepis “did not impact the valuation of Samsung BioLogics (ahead of its Kospi listing) in any way.”
“Samsung BioLogics had already met the listing standards of the US-based Nasdaq as well as Korea’s Kosdaq even when it was in the red,” the company said, adding that BioLogics’ value was determined by its own production capacity and Bioepis’ biosimilar development status in comparison to market competitors.
Furthermore, Samsung BioLogics strongly denied recurring allegations that it received preferential treatment when seeking a public listing on the Kospi last year.
In November 2015, Korea’s Financial Service Commission revised its listing regulations to allow companies in the red to be listed on the country’s main bourse. The revision allowed Samsung BioLogics, which had yet to generate any profit, to make a stock debut a year later.
Samsung BioLogics stated it “did not receive any form of preferential treatment during the process of its Kospi listing or after its public listing.”
It reiterated its former stance that it had initially pushed for a public listing on the US-based Nasdaq, where many global biopharma companies are listed, but decided on a Kospi listing after repeated requests from the Korea Exchange to be listed on a local bourse.
By Sohn Ji-young (email@example.com