What’s at stake in Samsung BioLogics accounting scandal?
[THE INVESTOR] Samsung BioLogics has come under pressure as the country’s financial authorities have claimed that the evaluation of its affiliate violated accounting rules.
Dubbed as one of Samsung Group’s future growth engines, the contract drug-manufacturing firm has enjoyed blowout days with its stock price jumping nearly fivefold to hit an all-time high in mid-April since its listing in November 2016.
Samsung BioLogics guilty of window-dressing: FSS
The Financial Supervisory Services issued a notification on May 1 giving Samsung Biologics a chance to defend itself before announcing its final measures in two months. Following this, accounting concerns sparked by the action wiped out some 6 trillion won (US$ 5.57 billion) of the biopharmaceutical firm’s market value.
The company made a surprising turnaround in 2015, driven by the skyrocketed value of its affiliate Samsung Bioepis with a new accounting procedure that it applied.
Samsung BioLogics denied the allegations, claiming it followed accounting rules with recommendations of experts and had not made any unreasonable gains.
Here are stakeholders who are engaged or will be affected by the issue.
Samsung BioLogics is known as the pet project of Samsung Electronics Vice Chairman Lee Jae-yong who had sought a new business model that will give an impetus to the conglomerate’s growth similar to that of its smartphone and chip businesses.
Some civic group and lawmakers believe that Samsung BioLogics was engaged in a big group restructuring that would help clear the succession path for Lee through its ownership structure.
Samsung BioLogics is 75 percent owned by Samsung Electronics and Samsung C&T, the group’s de facto holding company. With a 17 percent stake, Lee is the largest shareholder of Samsung C&T.
Lee was released from prison in February after being put behind bars for nearly a year on bribery charges.
US firm Biogen stands at the center of the controversy because of Samsung Bioepis, the joint venture it created with Samsung BioLogics in 2012 to develop biosimilars.
The spat between the FSS and Samsung BioLogics follows a disagreement over the legitimacy of labeling Samsung Bioepis as an affiliate although it had a 91.2 percent stake in the biosimilar-making unit.
While Biogen held the remaining 8.8 percent stake at that time, the Korean CMO said it had lost its dominate control over Bioepis, citing the possibility of the US firm exercising its call option to increase its stake to 50 percent minus one share. It has yet to exercise the option which will expire by end-June.
In its 2017 annual report, Biogen said it could tighten its grip on Samsung Bioepis. “We maintain the ability to exercise significant influence over Samsung Bioepis through a presence on the entity’s board of directors and our contractual relationship.”
Activists argued that Samsung Biologics’ 2015 earnings were inflated when it changed its accounting methods to reflect Samsung Bioepis’ market value instead of its book value. Under the new method, the biosimilar maker had a market value of at least 5 trillion won at that time, compared to some 330 million won in book value.
The company has launched five biosimilars in the European market and one in the US since it was founded in 2012.
Among them, its first biosimilar Benepali, a copycat of Amgen’s anti-inflammatory Enbrel, is generating most of its revenue, posting US$370.8 million in Europe last year.
Given that most of its biosimilars received approval in the past two years, they haven’t showed significant market penetration in the US and Europe including its copycat of Johnson & Johnson’s Remicade, which reported US$9 million revenue in 2017.
By Park Han-na (firstname.lastname@example.org)