As the Fair Trade Commission (FTC) announced to impose regulations on semi-conglomerates, Celltrion Inc., the largest biopharmaceutical company in South Korea, has been put on emergency alert. Celltrion sells its bio generic drugs, including Remsima, throughout the world on exclusive consignment through Celltrion Healthcare, the sales and marketing unit of Celltrion.
With the announcement of regulations on semi-conglomerates, the FTC has started an investigation into relevant companies whether they funnel work to their subsidiaries in the form of internal dealings. An official from the FTC said, “Celltrion is, of course, the subject to investigation. We don’t have anything more to say other than we have launched investigation.”
Celltrion has an asset of some 6.8 trillion won (US$6 billion). The company has been free from the regulations after the FTC has raised the minimum asset criteria for conglomerate watch list from 5 trillion won (US$4.41 billion) to 10 trillion won (US$8.82 billion) at the end of last year. However, Celltrion has come in for regulations as the FTC has recently specified the asset ceiling for its semi-conglomerate watch list.
Celltrion Chairman Seo Jung-jin owns a 94 percent stake in Celltrion Holdings, a de facto holding company of the group, and he controls its major biotech company Celltrion through the stake. He also has a 36.2 percent stake in Celltrion Healthcare. The problem is that most of Celltrion’s sales revenues come from Celltrion Healthcare. Celltrion sells its products to Celltrion Healthcare and Celltrion Healthcare resells them to pharmaceutical companies and large hospitals around the world.
In fact, Celltrion saw sales of 551.7 billion won (US$487.02 million), which is 82 percent of total sales of 670.58 billion won (US$591.97 million) last year, come from Celltrion Healthcare. This is why Celltrion Healthcare has a whopping 1.6 trillion won (US$1.41 billion) of inventory and Celltrion has 668.5 billion won (US$590.23 million) worth of account receivable for Celltrion Healthcare as of last year.
Under the agreement granting sales rights signed in 2008, Celltrion produces biosimilars and is in charge of clinical trial and approval procedures in other countries. Celltrion Healthcare receives all the products and sells them to local distributors as soon as Celltrion receives approval.
In regard to such a specialization structure, the FTC said, “We are examining whether companies that are subject to new watch list, including Celltrion, funnel work to their subsidiaries. We will look into whether Celltrion has gained an unfair profit by giving the exclusive sales rights to its subsidiary. However, we will be not be able to say if Celltrion’s work breakdown structure is subject to regulations until the investigation is completed.” Under the current FTC regulations, it is subject to regulation when the amount of internal dealings is more than 20 billion won (US$17.67 million) a year or accounts for over 12 percent of the total annual sales. So, the FTC will check if Celltrion unfairly makes a profit by supplying products at the price which is higher or lower than the market prices.
Some sources in the financial investment industry say Celltrion and Celltrion Healthcare should be merged. Celltrion, which is No. 1 stock on the secondary KOSDAQ by market capitalization, is considering a re-listing of the company shares in the primary KOSPI market. The company has decided to open an extraordinary shareholders meeting on the 29th to discuss the possible re-listing in the KOSPI market at the request of minority shareholders. However, some say that Celltrion should reduce excessive internal dealings between subsidiaries or be merged with Celltrion Healthcare first before relisting its shares in the KOSPI.
A investment banking expert said, “The price of Celltrion stocks repeatedly plunged in the past due to short stock selling. It means that there are market concerns on the structure of pharmaceutical sales. Celltrion needs to make its business structure transparent in order to grow into a global leading pharmaceutical company.”