May 3, 2018 / 10:26 AM / in 18 days

Samsung BioLogics' shares slide again; unit's valuation jump questioned

SEOUL (Reuters) - Shares in South Korea’s Samsung BioLogics Co Ltd (207940.KS) fell 3.5 percent on Thursday, a day after losing almost $6 billion in market value as the contract biotech drugmaker was hit by a regulatory probe into its accounting rules.

South Korea’s financial regulator said earlier this week it had given preliminary notice to BioLogics, an affiliate of tech giant Samsung Electronics (005930.KS), and its auditors of measures it could take concerning breach of accounting rules.

While the regulator did not elaborate, some lawmakers and an activist group have previously said BioLogics breached rules to inflate net profit before its 2016 listing. The drugmaker has denied it breached rules.

According to its stock market filing in 2016, the valuation in its books of loss-making drug developing unit Samsung Bioepis jumped by 18 times to 4.8 trillion won ($4.5 billion) in 2015 after it switched to valuing the unlisted firm at fair market value instead of at book value.

BioLogics said on Wednesday it treated Bioepis as an affiliate, not a unit, from 2015 and thus switched to fair market valuation, because it could lose control of the unit due to the possibility of the unit’s minority investor Biogen Inc (BIIB.O) exercising a call option to increase its stake to nearly 50 percent.

In making the switch of the valuation method, BioLogics said it followed accounting rules and recommendations by accounting experts, with the approval of country’s three major accounting firms.

The change in the method helped BioLogics swing to a net profit of 1.9 trillion won in 2015 from a loss of 28 billion won a year earlier, bringing criticism that the process, ahead of its $2 billion IPO in 2016, lacked transparency and may have misled investors.

“It’s unclear how they came up with the 4.8 trillion won valuation for a loss-making firm, and what kind of valuation criteria they used to reach that conclusion,” said Kim Eun-jung at People’s Solidarity for Participatory Democracy, the activist group that reported the case to the regulator last year.

    “If the value was inflated, Samsung BioLogics shareholders are the victims here.”

    Some blamed the regulators.

    “Regulators could have caught it earlier when it was being listed. I am more upset at regulators than Samsung. We are the ones damaged without any protection,” said an asset manager at a local firm who sold off personal holding of BioLogics shares on Wednesday.

    Shares in BioLogics, the world’s No.3 biotech contract manufacturer after Lonza Group (LONN.S) and Boehringer Ingelheim, have nearly trebled since its listing. The news of the notice on accounting irregularities sent shares in the $24 billion company down nearly 20 percent, its biggest daily drop, on Wednesday. The stock closed at its lowest level since January on Thursday.

    Regulators are expected to begin deliberating on the case within a month before making a final decision. If they rule that BioLogics violated accounting rules, South Korea’s stock exchange could then debate whether to delist the firm, an exchange official said.

    Biogen, which owns approximately 5 percent of Bioepis, has yet to exercise the option, and its CFO said last week on an earnings call that it plans to do that and increase its equity stake.

    ($1 = 1,074.2700 won)

    Reporting by Joyce Lee and Ju-min Park; Additional reporting by Bill Berkrot; Writing by Miyoung Kim; Editing by Muralikumar Anantharaman

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