South Korea’s financial regulator suspended share trading of Samsung BioLogics on Wednesday and fined the world’s third largest contract drugmaker 8 billion won, after ruling that it had committed accounting fraud in 2015 to inflate its value ahead of an initial public offering in 2016.
The Securities and Futures Commission also ordered the Korea Exchange, the stock market operator, to review whether Samsung BioLogics should be delisted. This would be a significant blow to Samsung group, which has bet on the biotech company as a future growth engine to reduce its reliance on the smartphone and semiconductor businesses. The stock market operator is expected to make a final decision in about a month.
The commission said BioLogics had used accounting rules to change the status of a research joint venture, Samsung Bioepis. This had had the effect of increasing the venture’s value, and in turn that of BioLogics, ahead of its flotation. “We concluded that the company violated accounting standards intentionally in 2015 to have legitimacy in changing its controlling power [in its affiliate],” said Kim Yong-beom, chairman of the SFC. The decision to change the accounting treatment of Bioepis should be cancelled, he said.
BioLogics denied any wrongdoing and said it would challenge the ruling in the law courts.
“We plan to file a lawsuit against today’s decision by the Securities and Futures Commission to prove legitimacy of our accounting practices,” said the company in a statement. “We are confident that our accounting practices did not violate corporate accounting standards.”
Shareholders will pay heavily in the interim, however. Roughly 75% percent of BioLogics is controlled by Samsung companies, with the balance held by outside investors. These shareholders will be unable to trade while the Korea Exchange conducts its review, and they now risk losing significant value on their holdings if the company is delisted, said experts.
“Delisting means that the company’s shares cannot be traded at the stock market. Shareholders can still trade it outside the market, but it will cut the liquidity seriously,” said a Korea Exchange official asking not to be named. “In some cases, the stock value becomes nearly zero.”
At the time of the IPO, BIoLogics shares were priced at 136,000 won each in South Korea’s second largest share sale, giving it a market value of 9 trillion won. They peaked in April this year at 570,000 won, but have fallen sharply in recent months on the accounting concerns, to hit 334,500 won when suspended.
The ruling is a severe setback for Samsung, which had identified BioLogics as an important vehicle in its new growth strategy. This included plans to invest 25 trillion won ($22 billion) in biotech along with artificial intelligence and 5G over the next three years, with the aim of transforming these businesses into the tech giant’s new cash cows.
“Biotech is one of Samsung’s new growth engines,” said Park Ju-keun, president of CEO Score, a corporate analysis company.
The financial watchdog recommended that BioLogics fire its CEO Kim Tae-han for the wrongdoings and handed the case to prosecutors.
The accounting companies who audited Samsung BioLogics were also punished. Deloitte Anjin was banned for three years from auditing the company, while KPMG Samjung was barred for five years and fined 170 million won for gross negligence. Four of KPMG Samjung’s accountants who handled the case will also be suspended from practicing.