FSC issues rules on treating bio R&D as assets

Korea’s financial authority released guidelines for how biopharmaceutical firms should list R&D spending as assets in the hopes of clearing up a controversy that has haunted the market since early this year.

According to the Financial Service Commission (FSC) guidelines released on Wednesday, if biopharmaceutical companies list their research and development expenses as assets, they need to provide objective evidence that shows they are related to proven technologies.

Previously, many biopharmaceutical companies recorded their R&D costs as assets, which raised the company’s operating profits in their performance reports, leading to higher share prices.

The ambiguity in accounting regulations was considered to be misleading to investors.

The FSC said the new guidelines are aimed at easing market anxiety caused by biopharmaceutical companies’ accounting practices.

In the case of new drugs, companies can list R&D expenses as assets once the drug enters the third phase of its clinical trials. The FSC said that according to U.S. biopharmaceutical industry statistics, the government approval rate for new drugs was roughly 50 percent after reaching the third phase after 10 years of clinical trials.

For biosimilar drugs, the government will allow expenses to be counted as assets after the first phase of clinical trials. For generic drugs, expenses can be listed after the company receives government approval for its bioequivalence test. The money spent to develop diagnostic reagents can be labeled as assets when a company applies for government approval or third-party verification for its drugs.

The FSC said it told 22 companies to make voluntary changes to their accounting books but decided not to take action against them.

A study by the Financial Supervisory Service (FSS) earlier this year found that 21 companies out of the 43 biopharmaceutical companies listed on the Kospi recorded their R&D spending as assets. Fifty-four bio companies out of the 90 traded on the junior Kosdaq market did the same.

Celltrion, the biggest biopharmaceutical company by market capitalization on the Kospi, which currently ranks third out of all companies after Samsung Electronics and SK Hynix, listed 76 percent of its R&D expenses, or 117.1 billion won ($104.4 million), as assets in the third quarter of 2017, according to an FSS report from January. Samsung Bioepis counted 36 percent of its development costs as assets.

Under the previous accounting standards, R&D expenses used for technology that has the potential to be developed and create profit in the future can be listed as assets. The problem was that since it did not specify conditions, the definition was up to companies’ interpretation.

If these expenses were recorded as costs, the company’s operating profit in its performance report would shrink.

“Usually, it takes an average of 15 years and expenses of over 1 trillion won to develop new drugs, with the success rate at 0.01 percent,” said a FSC official. “Many [biopharmaceutical companies] are SMEs facing heavy competition due to the small size of the domestic market.”

The official said biopharmaceutical companies’ share prices have surged recently, leading to increased market volatility.

“We saw the need to expand protection of investors,” the official added. “Some of these companies don’t even have a stable profit base and even face being delisted.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]