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Korean Refineries, Chemical Firms Look to Biotech for Future Growth
Right Time to Invest in Bio
Korean Refineries, Chemical Firms Look to Biotech for Future Growth
  • By Choi Mun-hee
  • July 25, 2018, 16:22
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Korean refineries and chemical companies are ramping up investment in the biotechnology sector to drive their future growth. 

Korean refineries and chemical companies are turning their attention to the bio-pharmaceutical market. Experts say that now is the right time for these companies to invest in biotech, a major future growth engine, as they have accumulated enough profits from their prosperous businesses.

The SK Group recently acquired AMPAC, a US bio-pharmaceutical contract development and manufacturing organization (CDMO).

The acquisition price is estimated at 800 billion won (about US$714 million) including 500 billion won for recapitalization and 300 billion won for acquisition financing.

With the acquisition, SK Group owns SK Biopharm, SK Biotec, and AMPAC in the bio sector. Experts predict that the synergy they will create will have a positive influence on their future earnings.

The SK Group has been active in the bio-pharmaceutical business. Last year, SK Biotech bought Bristol-Myers Squib’s (BMS) Irish production facility at 170 billion won. Earlier this year, Chey Tae-won, chairman of the SK Group, said he would invest 2 trillion won in the healthcare sector for three years.

The SK Group's pharmaceutical business is handled by SK Chemicals. SK Chemicals established SK Bioscience last month by splitting the vaccine business division in order to strengthen its expertise.

SK has transformed itself a comprehensive pharmaceutical company that encompasses all activities ranging from drug R&D to production, sales and marketing.

Yang Ji-hwan, a researcher at Daeshin Securities, said “SK will soon emerge as a CDMO with the production capacity of 1 million liters if it combines the production facilities of Irish BMS (about 400,000 liters) acquired last year and the US AMPAC facilities of about 600,000 liters. They will be able to strengthen the group’s bio business and create synergy effects in cooperation with its bio subsidiaries such as SK Biopharm and SK Biotec.”

LG Chem, a flagship of the Korean chemical industry, also views the bio business as a next-generation growth engine and is actively supporting it.

LG Chem announced last year that it would advance into three biotech sectors: red (pharmaceutical and vaccine), green (agrochemical) and white (energy). It aims to become the world's leading bio company by achieving sales of 5 trillion won by 2025, 3 trillion won in green biotech and 2 trillion won in red biotech.

Park Jin-soo, vice chairman of LG Chem, said, "LG Chem has selected energy, water and biotech as its mid- to long-term growth engines. We will make an active effort to find new business opportunities including M&As especially in the bio sector."

LG Chem acquired Farm Hannong in April 2016 for 400 billion won and absorbed LG Life Sciences in the following year.

It was interpreted as a move to make achievements in red biotech including new medicine following green biotech. In fact, LG Chem has recently launched Eucept, Enbrel's etanercept-based biosimilar product, in Japan. At the moment, LG Chem is the only company that sells Enbrel’s biosimilar in Japan.

According to the Financial Supervisory Service's electronic disclosure system, LG Chem plans to spend 1.1 trillion won on R&D this year, up 20% from the previous year. Out of this, 140 billion won will be invested in bioscience.

OCI has also chosen the bio-pharmaceutical business as its new growth engine. The company established a bio-pharmaceutical joint venture (JV) with Bukwang Pharmaceutical this month. OCI and Bukwang Pharmaceutical plan to jointly invest more than 10 billion won every year in developing new drugs.

GS Caltex, Korea’s second largest refinery following SK Innovation, is also focusing on biochemical as a new growth engine, while diversifying its business portfolio into non-refining sectors.

GS Caltex started the construction of a pilot plant for the production of biobutanol in its plant in Yeosu in 2016. The plant, which cost 50 billion won, will produce about 40 billion tons of biobutanol per year. Biobutanol is considered to be an alternative energy source for fuel such as oil that will be exhausted in the future.

These oil refineries and chemical companies are known to have enough cash thanks to robust market conditions over the past few years. LG Chem's cash and cash equivalents in the first quarter of this year were 2.91 trillion won, the highest level ever. SK Holdings' cash equivalents in the first quarter stood at about 8 trillion won and GS Caltex about 1 trillion won, respectively.

"Currently US chemical companies are expanding their ethane cracking centers (ECC) in large quantities. For fear of oversupply, Korean chemical companies cannot expand their facilities. I think this is why domestic chemical companies chose the bio sector as an investment alternative,” said a researcher of energy sector at a securities firm.

A chemical industry official said, "The bio market is expected to expand in the future, and there is enough room for investment. As global demand for chemical products is forecast to steadily increase until 2020, chemical companies will be able to secure a cash surplus and seek to use it for acquiring bio companies.”


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