BioLogics gets break in FSS case

Samsung BioLogics may have just received a big break.

The beleaguered pharmaceutical company reported in a regulatory filing Friday that its U.S. partner Biogen intends to exercise its call option right in their joint venture Samsung Bioepis.

Samsung BioLogics expects that the call option announcement could be key evidence that would clear the company of accounting fraud allegations.

According to BioLogics, Biogen sent a letter to the company on Thursday that said it would exercise its call option in Bioepis before the June 29 deadline to do so.

Biogen is a U.S. biotech company that established Samsung Bioepis in 2012 in a joint venture with Samsung BioLogics.

The Korean company invested 280.5 billion won ($259.8 million) for an 85 percent stake, while Biogen put up 49.5 billion won for a 15 percent stake plus a call option that could enable the U.S. partner to increase its stake up to just one share under 50 percent.

A call option is an agreement that gives an investor the right, but not obligation, to buy a stock for a set price at or by a certain date.

Currently, BioLogics holds a 94.6 percent stake in Bioepis. Biogen holds the rest.

The American company’s announcement could be a game-changer in the dispute between BioLogics and Korea’s Financial Supervisory Service. The dispute centers over the drug maker’s motivations in shifting Samsung Bioepis from subsidiary to affiliate status in 2015.

BioLogics said that it changed the biosimilar drug developer’s status because it was highly likely that Biogen would exercise its call option, which would deprive BioLogics of control over Bioepis. According to BioLogics, a company needs a stake of 52 percent or more to have control over Bioepis, according to the terms it was founded under.

In the process, BioLogics also changed the accounting standards applied to Bioepis, and used market value instead of book value, as it had done previously, to assess it.

The FSS, however, challenged the legitimacy of Samsung BioLogics’ decision to change the status of Bioepis based on Biogen’s possible use of its call option.

The regulators concluded in a preliminary ruling on May 1 that BioLogics breached accounting rules by deliberately inflating its corporate value ahead of a planned market listing in 2016.

BioLogics, which suffered operating losses for four straight years, managed to pull off a net profit of 1.9 trillion won in 2015 thanks to a market price valuation that listed Bioepis, established on a 330 billion won investment, as worth 4.8 trillion won.

Now that Biogen plans to use its call option, BioLogics will use it as evidence to counter claims by the FSS that the high likelihood of the U.S. company exercising its call option was a made-up argument by BioLogics.

Still, critics say it is not valid evidence that could turn around the ongoing dispute, since what really matters is whether Biogen intended to exercise its call option back in 2015, when the Korean company changed the status of Bioepis.

During the first review session on the accounting fraud controversy conducted by the Financial Services Commission on Thursday, the FSS revealed its smoking gun against BioLogics - what it said was a failed attempt by the Korean company to make Biogen exercise the call option at the end of 2015.

According to the FSS, BioLogics insisted that Biogen use its call option to jointly run Bioepis and invest cash in developing biosimilar products in 2015.

However, the U.S. company did not accept the request, and instead demanded BioLogics give it sales rights to drugs it developed. BioLogics rejected the new demand, and Biogen did not exercise the call option.

The FSS claimed that since BioLogics already tried to get Biogen to use its call option in 2015, the company is lying when it said that it was highly likely for Biogen to exercise its call option. BioLogics, however, said the FSS’s argument was groundless.

“The benefits Biogen can take from exercising its rights are evident, since it only invested around 50 billion won in Bioepis, but by August 2015 the biosimilar company was valued at roughly 5 trillion won,” said Yoon Ho-yeol, a director at Samsung BioLogics.

The FSS said it would hold a second review session on the case on May 25, as the dispute is still ongoing.

The second review will be an unusual head-to-head confrontation between Samsung BioLogics and the regulator.

BY KIM JEE-HEE, KIM DO-NYUN [kim.jeehee@joongang.co.kr]