What’s the worst case scenario for Samsung BioLogics?

An announcement by the nation’s financial regulator on Samsung BioLogics’ alleged breach of accounting rules before its market debut in 2016 last week has sent shockwaves across the market, not only dealing a serious blow to the South Korean biotech drug manufacturer, but also placing a heavy burden on the authorities to prove their claim.

The Financial Supervisory Service said on May 1 that it had issued a preliminary notice to Samsung BioLogics and its auditors that it could take action over the suspected rule breach, ending its yearlong probe into alleged accounting fraud.

As indicated, the FSS, in its final announcement, is likely to urge the company to fire its CEO, issue penalties, and send the case to the prosecution.

At the same time, the case will be sent to the nation’s bourse operator to review whether to delist the company. If found to have been “intentional” -- the worst outcome for Samsung BioLogics -- the Korea Exchange could expel the 30 trillion won ($27.85 billion) company from the market. The chances the Samsung affiliate will be delisted, however, are low.

But industry watchers said there is still a need for caution, citing how the FSS appears to have critical evidence that could prove Samsung BioLogics violated accounting rules.

“(The FSS) seems to have a critical document (on Samsung BioLogics’ alleged accounting fraud), otherwise it would not have initiated this battle, as officials know how big an impact its decision will have on the market,” an industry insider familiar with the matter said on condition of anonymity.

Meanwhile, the longer the case takes, the bigger the damage that will be suffered by Samsung BioLogics.

 

“The best-case scenario would be a final decision from the FSS and the Financial Supervisory Commission in 1H18 and Samsung BioLogics being ordered to pay affordable penalties quickly,” said Seo Mi-hwa, a bio analyst at Yuanta Securities, in a report.

“The worst-case scenario would be a delayed final decision and resolution (administrative litigation). In that case, our rating could change depending on the FSC’s financial decision and progress,” she said.

Samsung BioLogics expressed regret Tuesday, criticizing the authorities for leaking accounting information to the public. It also said it would risk taking the case to court, reiterating its innocence.

Aside from the anticipated penalty, the company is concerned about unprecedented losses in the market, as well as losing the trust of investors.

“Not just us, but other players in the biopharma sector are worried about the case aggravating mistrust in the country’s emerging bio industry,” an insider at the company said, calling the authorities’ move “highly political.”

Due to its sensitivity, the case will be tough not only for Samsung BioLogics but also the FSS.

“After all, the deeper the case goes, the more it would hurt both sides,” he said.

By Cho Chung-un (christory@heraldcorp.com)