Samsung Biologics’ Statement on recent media reports

regarding the Samsung Biologics’ IPO

Samsung Biologics has prepared a statement regarding recent reports in the Korean media alleging that Samsung Biologics received preferential treatment from the Korean government during its IPO.

1. What is the reason for Samsung Biologics’ substantial net profit in 2015?

Valuation gains resulted from a one-time net profit (non-operating profit) in 2015, as Samsung Biologics’ subsidiary, Samsung Bioepis, was no longer accounted for as our consolidated subsidiary and instead became an investment in associate, which was initially recognized at fair value and accounted for using the equity-method.

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At the end of fiscal year 2015, the accounting firm KPMG Samjung believed that Samsung Biologics should carry out a fair value evaluation under the International Financial Reporting Standards (IFRS) in order to recognize the liabilities related to the call option of Biogen, our joint venture partner in Samsung Bioepis. (Before 2014, we determined that we did not or could not determine Samsung Bioepis’ value). 

The value of Samsung Bioepis rose greatly due to the successful marketing approval of biosimilars in Korea and Europe in late 2015 and early 2016.

 Samsung Bioepis is currently valued at KRW 5,272.6 billion, of which KRW 4,808.6 billion is equivalent to 91.2% of Samsung Bioepis shares held by Samsung Biologics. Taking out the amount already reflected in the financial records, the valuation gain amounts to KRW 4,453.6 billion.

Samsung Bioepis’ earnings before interest and taxes (EBIT) is KRW 2,723.2 billion excluding the value of the call option held by Biogen (worth KRW 1,820.4 billion) and KRW 2,064.2 billion is reflected in net profit considering corporate tax.

□ Accounting treatment related to Samsung Bioepis at the end of 2015 (in KRW billions)

Samsung Biologics did not want to change its valuation method as it could be misleading, due to large-scale valuation gains. However, we accepted a change to the valuation method because we respected the recommendation of our external auditors who advised us that it should be strictly evaluated according to IFRS standards, enhancing accounting transparency as a global company.

Deloitte Anjin, our designated external auditor in 2016, determined that the accounting treatment was correct, and the Korea Exchange also considered it appropriate. 

2. Why was Samsung Bioepis, a subsidiary company of Samsung Biologics, changed from consolidated subsidiary to equity-method subsidiary in 2015?

It was done in accordance with requirements based on the IFRS, not based on Samsung Biologics’ choice.

Samsung Biologics changed Samsung Bioepis from consolidated to equity-method subsidiary in its 2015 financial records, upon the request of the accounting firm KPMG Samjung. The change was in line with IFRS corporate accounting standards 1110 B23(3).

The reason for removing Samsung Bioepis as a consolidated subsidiary was as follows. For Biogen, a joint shareholder of Samsung Bioepis, the value of the holding shares subject to the call option became greater than the price of exercising the call option (in-the-money) as development results of biosimilars became more visible and substantial. Thus, as Biogen’s exercise of the call option became substantially likely, Samsung Biologics effectively lost control over Samsung Bioepis. As a result, Samsung Bioepis was changed from a consolidated subsidiary to an equity-method subsidiary. 

3. Why didn’t Biogen, Samsung Biologics’ joint venture partner for Samsung Bioepis, reflect the call option value?

Biogen is a U.S. company that does not recognize nor reflect the call option in their financial books. This is because, unlike the recognition criteria of K-IFRS, it can be regarded as an accounting treatment according to US GAAP. The net settlement is not possible in US GAAP. The recognition criteria of the derivative are not met and thus evaluation of the derivative is not carried out.

Therefore the reason Samsung Biologics recognized a derivative liability, and Biogen did not so with the same option is due to the GAAP difference, and thus, it is appropriate to treat it differently.

4. Is Samsung Bioepis' investment valuation reasonable ?

The valuation of Samsung Bioepis was evaluated by the accounting firm Deloitte Anjin. Deloitte Anjin evaluated Samsung Bioepis’s valuation to be KRW 5,272.6 billion (reflected by a discount rate), based on the sales and cash flow prospects after the development of biosimilars as well as the possibility of success.

As a result, if we take out the debt-to-call option of KRW 4,808.6 billion held by Biogen out of Samsung Biologics’ holding of assets for shares worth KRW 4,808.6 billion, the valuation of Bioepis would be KRW 2,988.2 billion.

When Samsung Biologics was preparing for IPO, the underwriters valued Samsung Bioepis at KRW 3,415 billion, by comparing the valuation of Celltrion and Coherus (U.S.). Therefore, such valuation is not an over-estimation.

5. How did the net profit generated in 2015 affect Samsung Biologics’ IPO?

The one-time net profit (non-operating profit) reflected in 2015 did not have any effect on the valuation of Samsung Biologics during the IPO.

Even with its operating deficit, Samsung Biologics already met the listing conditions of NASDAQ in the U.S. and KOSDAQ in Korea. Moreover, the net profit did not have anything to do with amending the KOSPI listing regulations.

During the IPO process, Samsung Biologics’ valuation was determined by comparing various factors ? such as manufacturing capacity and development status of biosimilars by Samsung Bioepis ? with those of competing companies such as Lonza and Celltrion. Therefore, the one-time net profit did not have any influence over Samsung Biologics’ valuation.

6. Did Samsung receive any preferential treatment during the listing process on the KOSPI?

Samsung Biologics did not receive, both during and after the listing process, any preferential treatment whatsoever.

Samsung Biologics was qualified to be listed on the KOSDAQ even before the amendment of the KOSPI listing regulations. In fact, the company first considered listing on the NASDAQ because of various conditions ? a higher understanding of the biotech industry, broader business expansion opportunities, and possible collaborations with global pharmaceutical companies.  Furthermore, being a company with profit is not a requirement of being listed on the KOSDAQ or NASDAQ, particularly because of the large up-front investment required in the biotech industry. There are several well-known examples on the KOSDAQ and NASDAQ. Tesla is a good example of such a company on the NASDAQ.  It went public in 2010, despite a deficit of USD150million. Even the KOSDAQ has a technology exception, which allows unprofitable but promising companies with cutting edge technologies to go public, and supports their growth into global entities.

In fact, even when KOSPI officials constantly tried to attract Samsung Biologics after the amendment of their listing regulations, our answer was that, “We currently do not have any plans for IPO, but if we do, our first consideration would be NASDAQ. We will review in detail when we actually do decide to go public.”

In the process of reviewing several possibilities, Samsung Biologics decided to go public on the KOSPI index, considering continuous suggestions from the KRX, amendment of the KOSPI listing rules, and domestic public opinion and expectations.

7. How has the listing of Samsung Biologics affected the merger of Samsung C&T, and why did Samsung Biologics go ahead with the public offering?

Since the merger of Samsung C&T was completed on September 1, 2015 and the listing of Samsung Biologics was conducted in November 2016, there is no correlation between the listing of Samsung Biologics and the merger of Samsung C&T.

In order to meet the increasing global production demand of bio-pharmaceuticals, Samsung Biologics constructed Plant 3 with an investment of KRW 850 billion in December of 2015.

 Also, the decision to go public was made in April 2016 due to the need for funding, and in order to further support the development of biosimilars at Samsung Bioepis.

Out of the KRW 1,500.0 billion raised from the listing in November 2016, KRW 750 billion is being used for the construction of Plant 3, KRW 400 billion will fund Samsung Bioepis (it was and will be provided separately in December 2016 and June 2017, respectively), and KRW 350 billion will be used for maturity debt repayment.

8. About Samsung Bioepis’s deferred corporate taxes

According to Section 1036 of the K-IFRS related to assets impairment, the fair value of a company based on the model of equity investment can be determined based on a time period of more than 5 years, if there are reasonable causes.

Most companies in the biosimilar industry are early stage.  Due to the long time required to develop and commercialize products, it is estimated that companies in the biosimilar industry need at least 5 years to reach the sales stage. Considering other factors such as patent expiration and maturity period after launching products, we reasonably determined Samsung Bioepis’s value on a timeline ending 2025.

On the other hand, corporate deferred taxable assets should be recognized when taxable income is expected in the foreseeable future.

If a company’s taxable income is not greater than the accumulated deficits in a short period of time, there are no corporate deferred taxable assets.

Therefore, the standards Samsung Biologics applied when valuing the fair value of Samsung Bioepis’ shares were different from the standards Samsung Bioepis’ uses when filing its corporate.

 9. What is the value of Samsung Biologics’ listing?

Since its public listing, Samsung C&T and Samsung Electronics now collectively hold 75% of Samsung Biologics’ shares, and the remaining 25% are being traded in the KOSPI market.

Out of the 25% publicly traded in the KOSPI market, as of February, foreign shareholders hold approximately 12%, institutional and individual investors from home and abroad hold approximately 9.7%, and Samsung Biologics’ employees hold approximately 3.3% (with shares that cannot be traded in the market until November of this year).

Samsung Biologics achieved the second-largest listing (about US$ 2 billion) in the global bio-pharmaceutical industry, following the largest listing of Genentech in 1999 (US$ 2.1 billion). Samsung Biologics received high praise in the market for achieving a successful IPO as a company in Korea/ Asia, where the basis for the bio-pharmaceutical industry is still weak.

In particular, Samsung Biologics’ IPO gained the attention of many foreign investors, attracting more than USD13.4 billion in stock subscriptions, which was a competition ratio of 17:1.

Considering that Alibaba’s competition ratio, which is considered as the most successful public offering ever, was 13:1, one can understand how much interest Samsung Biologics’ public offering attracted among foreign investors.

Since the listing, the ratio of foreign shareholders has been steadily increased from 9% to 12%.

After listing, the share price has shown a relatively stable upward trend, and it has been showing good performance among the other companies listed in 2016.

10. What are Samsung Biologics’ business achievements and the future prospects for Samsung Biologics?

Samsung Biologics recently publicly announced its 2016 earnings on January 24, 2017.

Sales recorded KRW 294.6 billion, a 223% increase compared to last year, and operating profit exceeded our management’s initial target, recording an 85% increase.

In 2017, Plant 1 will continue its full-scale operation, and we expect the utilization of Plant 2 to gradually increase, enabling Samsung Biologics’ performance as a bio CMO company to continuously improve.

※ Business Performance of Samsung Biologics (in KRW billion)                        

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