The stock price of Samsung BioLogics dropped by more than 17% after the Financial Supervisory Service (FSS) made an announcement on Samsung BioLogics’ accounting fraud allegations.
On May 2, the stock price fell 17.21% or 84,000 won per share and closed at 404,000 won with the daily trading volume skyrocketing from 235,000 shares to 2,319,000 shares. That day alone, the market capitalization of Samsung BioLogics decreased by approximately 5.5 trillion won.
This has to do with the FSS announcement on May 1, when the regulator reached a provisional conclusion that Samsung BioLogics violated accounting standards in late 2015 while turning Samsung Bioepis into an affiliated company from its subsidiary company.
An accounting fraud constitutes a reason for delisting and, as such, much attention is being paid to how Samsung BioLogics will be restricted in the stock market. A continuous drop in stock price seems inevitable.
The fate of Samsung BioLogics shares will be determined by the Securities and Futures Commission (SFC) of the Financial Services Commission and the Accounting Oversight Deliberation Committee of the FSS. Listing eligibility review and temporary trading suspension may follow when it is determined that the violation is equivalent to more than 2.5% of the company’s capital. Still, actual delisting is rather unlikely given similar previous cases concerning Korea Aerospace Industries, Daewoo Shipbuilding & Marine Engineering, and so on.
Financing Difficulties Looming Large
Difficulties are anticipated on the financing side, too. If the allegations turn out to be true and the possibility of delisting increases, financing for business expansion will become increasingly difficult.
Three years ago, Samsung BioLogics enjoyed a valuation gain of about two trillion won through a simple change in accounting method. However, significant losses may be incurred from another change. Samsung BioLogics is currently planning to build its fourth manufacturing plant as the largest one of its plants, but the plan may be thwarted as the case may be.
Samsung BioLogics’ corporate bonds were popular with institutional investors, despite the lack of credit rating, because of the brand name of Samsung. Last month alone, the company issued private placements worth 190 billion won. It has issued private placements six times since 2014 and the outstanding issue amounts to 290 billion won.
According to the FSS, Samsung BioLogics’ debentures and bank borrowings due within one year add up to 138.6 billion won and it has 407.2 billion won in long-term borrowings. Although the company is capable of repaying the borrowings based on its cash and cash equivalents that added up to 358 billion won at the end of last year, things may change depending on the decision of the SFC and the FSS.
Samsung Bioepis, which has also increased its borrowings from abroad, may face more difficulties than before as well. Samsung Bioepis issued foreign currency-denominated corporate bonds worth US$30 million in Japan in March last year and US$100 million in September 2017.
Samsung BioLogics Refutes FSS Announcement
The biggest issue concerning Samsung BioLogics is why it valuated Samsung Bioepis based not on its acquisition cost but on its fair value. On May 2, Samsung BioLogics refuted the conclusion of the FSS with a new basis of valuation.
At present, Samsung BioLogics is claiming that its valuation method reflected the likelihood of joint venture partner Biogen exercising its call option after an increase in Samsung Bioepis’ enterprise value following US approval on its new drug. “We changed the equity valuation method during the subsidiary-affiliated company conversion in view of the likelihood, and the financial authorities are failing to understand such specific industrial situations,” it said.
In addition, Samsung BioLogics refuted the FSS determination that the conversion was an arbitrary decision made with Biogen mentioning nothing about whether it would exercise the call option. “Biogen sent its letter of intent regarding the call option back in July 2015, when Samsung Bioepis was planning on a Nasdaq IPO, and Biogen resumed its participation in paid-in capital increase in February 2015,” Samsung BioLogics managing director Shim Byung-hwa explained, adding that his company shared the letter with the FSS to boot.
The Korea Institute of Certified Public Accountants, which reviewed the audit of then-unlisted Samsung BioLogics in 2015, also raised a question about the conclusion of the FSS. “Both Samjong KPMG and Deloitte Anjin handled the matter with extreme caution at that time in view of its complexity and Samsung BioLogics’ contract had nothing to be argued,” the institute pointed out.