South Korea’s financial authorities have launched an audit of Celltrion Healthcare Co. and is expanding the audit review to the company’s affiliates such as Celltrion Inc. and Celltrion Pharm Inc. Accordingly, there is a growing concern that the audit can lead to a prolonged war that goes through the Securities & Futures Commission (SFC) under the Financial Services Commission (FSC) just like the Samsung BioLogics case.
The financial authorities said they would investigate all of the allegations against not only Celltrion Healthcare but also the Celltrion Group as a whole. In response, Celltrion said there was nothing wrong with its accounting practice and it would not change its financial statements. The two sides are expected to engage in a fierce battle until the financial authorities make a final conclusion.
What prompted the Financial Supervisory Service (FSS) to audit the Celltrion companies is Celltrion Healthcare’s contract with Celltrion Inc. in the second quarter of this year. Celltrion Healthcare is a company set up to sell products produced by Celltrion Inc. It took over the marketing rights from Celltrion Inc. But in the second quarter of this year, Celltrion Healthcare sold the marketing right in Korea back to Celltrion Inc. to focus on overseas markets. It received 21.8 billion won (US$19.31 million) from Celltrion Inc. and registered it as "sales." In the view of the FSS, the treatment of the money as sales is inappropriate.
Celltrion Healthcare released a quarterly report that it posted 15.2 billion won (US$13.46 million) in operating profit in the second quarter, which included the proceeds from the sale of the domestic marketing right to Celltrion Inc.
Celltrion Healthcare could have recorded an operating loss in the second quarter if it had not treated the proceeds from the sale of the domestic marketing rights as sales. In this regard, some point out that it is inappropriate for Celltrion Healthcare to register the money it received from Celltrion as sales instead of non-operating profit. There is no problem in treating it as sales when the transfer of domestic marketing rights is considered as the main business activity of the company. Otherwise, it can be seen as an accounting malpractice.
On the allegation, however, Celltrion Healthcare argued that the company is generating profits by using the global exclusive franchise rights, and that the revenue from such activities can be judged as sales in line with corporate accounting standards. Regarding this, the FSS says it is hard to see the transfer of the domestic marketing right by Celltrion Healthcare, whose main business is selling biomedicine manufactured by Celltrion, as a business activity.
In addition, the FSS will look into Celltrion Healthcare over allegations that it committed accounting fraud related to sales in its overseas subsidiaries.
With the FSS putting all-encompassing pressure on the Celltrion Group, Celltrion Healthcare is planning not to change its financial statements as there is no problem with its accounting practice. Accordingly, the FSS will not consider Celltrion eligible for mitigation of penalties as well. Generally, a company subject to an audit can lower the level of sanctions when it voluntarily changes the financial statements or changes the financial statements within a month after the audit begins. Celltrion is forecast to actively take a posture of defense as it has made it clear that it does not want to lower the level of sanctions by changing the financial statements because it will then be labeled as a company committing an accounting fraud.
Therefore, it is highly likely that the final conclusion will emerge through the board of supervisors and the SFC like the Samsung BioLogics case. It means that uncertainty in the pharmaceutical and bio industry can linger for a while once again until the audit results come out, following Samsung BioLogics.