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FSS launches audit of Celltrion Healthcare for alleged accounting malpractices
Rekindling Concerns over Biotech Companies
FSS launches audit of Celltrion Healthcare for alleged accounting malpractices
  • By Yoon Young-sil
  • December 11, 2018, 17:07
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The Financial Supervisory Service (FSS) has launched an investigation into Celltrion Healthcare, a biological medicine marketing company with the largest market capitalization in the KOSDAQ market, for alleged accounting irregularities.

The investigation is expected to have considerable impact on local stock markets as it came following the financial regulator’s audit of Samsung BioLogics. .

According to financial circles and industries on Dec. 11, the FSS suspects that the company has violated accounting rules when it sold the right to sell biological medicines in the Korean market back to Celltrion Inc. for 21.8 billion won.

Celltrion Inc. is a company that develops and produces bio-pharmaceuticals while Celltrion Healthcare is in charge of selling those products. The largest shareholder of Celltrion Healthcare is Celltrion chairman Seo Jeong-jin.

Celltrion Inc. transferred the exclusive right to sell its products to Celltrion Healthcare in the past, and it paid 21.8 billion won to Celltrion Healthcare in the second quarter of this year for buying back the right to sell products in South Korea.

Celltrion Healthcare’s operating profit in the second quarter of the year was 15.2 billion won, 66.5 percent less than the same period last year, raising suspicions that the company barely avoided recording an operating loss on the back of the money from Celltrion Inc.

In particular, FSS believes that the company’s accounting treatment of the transfer of the marketing right, which is an intangible asset, as sales is inappropriate.

Following Samsung BioLogics, Celltrion Healthcare, another large biotech company, came under suspicion of fraudulent accounting.

Korea Exchange's decision to keep Samsung BioLogics listed on the stock market seemed to have eased uncertainties over accounting at biotech companies. But the FSS audit of Celltrion Healthcare has reignited concerns over the entire biotech industry.

The price of Celltrion Healthcare closed at 71,600 won on Dec. 11, down 12.04 percent from the previous day. Its market capitalization was 10.067 trillion won, barely staying above the 10 trillion won mark.

The stock price of Celltrion Inc. also fell 10.02 percent to 220,000 won on Dec. 11, decreasing its market capitalization to 27.63 trillion won, still the third largest in the KOSPI market. Yet the gap with Samsung BioLogics Co., the fourth largest KOSPI company whose stock resumed trading on the day, has sharply decreased. Celltrion Pharm Inc., the last of the "three Celltrion brothers," also suffered a 7.92% decline in stock price.

Celtrion Healthcare defended itself in a statement released on the day. "As we are generating profits by using our worldwide exclusive right to market Celltrion products, we judge that profits earned from these activities can be treated as sales, and this is an accounting treatment that complies with the International Financial Reporting Standards," the statement said.

"We have been discussing this matter with Celltrion Inc. since last year in order to put our focus on overseas markets rather than on smaller domestic markets, and signed a contract to transfer the rights of sales to Celltrion Inc.," it said.

On the other hand, the FSS plans to review the financial statements of biotech companies next year to ensure that they do not treat intangible assets, such as goodwill and development costs, arbitrarily.

The FSS focused on biotech companies’ tendency to treat research and development expenses as assets this year.