Celltrion affiliate investigated for accounting fraud

The country’s financial regulator is taking aim at another big bio player for alleged accounting fraud just days after the Korea Exchange decided against the delisting of Samsung BioLogics.

The Financial Supervisory Service (FSS) launched an investigation into Celltrion Healthcare, a marketing affiliate of biopharmaceutical company Celltrion, earlier this week. The affiliate, which is Kosdaq listed, dropped 12.04 percent on Tuesday.

Main board-listed Celltrion dropped 10.02 percent, while Kosdaq-listed Celltrion Pharm fell 7.92 percent.

The regulatory agency is looking into an allegation that Celltrion Healthcare incorrectly booked proceeds from the sales of local distribution rights to parent Celltrion in the second quarter.

The 21.8 billion won ($19.3 million) transaction helped Celltrion Healthcare avoid an operating loss in that quarter. It instead reported 15.2 billion won in operating profit.

The FSS and Rep. Lee Hack-young of the ruling Democratic Party raised doubts about the accounting as transactions of this type with affiliates are typically categorized as non-operating income. The affiliate holds exclusive rights to sell Celltrion products through a contract made in the late 2000s.

“The suspicion is that Celltrion Healthcare turned profit by counting the sale of the distribution rights as revenues,” the representative said during the national audit in October, “The FSS should launch a probe to clarify whether the suspicion is true.”

Celltrion Healthcare denied the allegation, saying that the practice is in line with corporate accounting rules and agreed upon by the company’s board of directors.

“We are in the process of focusing more on global business, so the selling of local distribution rights is a part of our strategy,” the company said in a statement.

Some analysts worry that the investigation of the heavyweight on the junior Kosdaq board will have an impact on other bio stocks.

On Tuesday, smaller caps bio companies, such as SillaJen, Kolon TissueGene and Hugel, were all in the negative territory, with SillaJen down more than 5 percent. But many bio stocks, including Celltrion, Celltrion Healthcare, SillaJen and Hugel rebounded on Wednesday following the steep decline.

Analysts estimate that the elimination of the controversial sale would marginally affect Celltrion Healthcare’s annual earnings.

“The market consensus for 2018 annual revenues could decline from 1.69 trillion won to 1.47 trillion won,” said Lee Tae-young, an analyst at KB Securities.

“The operating profit will drop 17.3 percent from 125.7 billion won to 103.9 billion won,” the analyst said, adding that “There could be concerns for worsening of investment sentiment, but that factor was already priced into Tuesday’s plunge.”

Jin Heung-guk, an analyst at Korea Investment & Securities, echoed the view.

“Compared to the accounting fraud scandal at Samsung BioLogics, the impact would not be that big,” Jin said.

“The deal in question is worth about 20 billion won while that of Samsung BioLogics was 4.5 trillion won, which makes a huge difference. And investors also went through the drama surrounding BioLogics, so the shockwave would not be as sever,” the analyst said.

Celltrion Healthcare made an impressive debut on the Kosdaq last year, quickly becoming the second largest player on the exchange in terms of market capitalization.

Founded in 1999, Celltrion Healthcare is the sales arm for the drug maker, leading local and global marketing of the producer’s biosimilars to over 100 regions.

The largest shareholder of Celltrion Healthcare is Celltrion chairman Seo Jeong-jin.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]