CHA Biotech, one of the promising bio-stocks, has been downgraded to an administrative issue, giving a shock to the KOSDAQ market.
|Cha Bio Complex|
The company put a public notice Thursday, saying it received “limited” opinion from an external auditor.
Auditors issue “qualified” opinion if there are no violations regarding auditing standards, and “disqualified” opinion if there are violations. If the evidence is insufficient or the balance sheets are not made according to auditing principles, they issue “limited” opinion.
CHA Biotech belongs to the third case.
Accordingly, the Korea Exchange designated the company, which had registered operating loss for four consecutive years, as an administrative issue.
The designation was reflected on the company’s stock price immediately, pulling down its share price to 23,700 won ($22.1) as of 11 a.m. Friday, a decrease of 29.99 percent from the previous day.
Speculation is arising in this regard whether the Korean bio stock market is on a downward spiral following the reported policy change not to regard R&D expenses as intangible assets.
CHA Biotech is the first case to come under the audit of the stock regulators. The biopharmaceutical firm, which has engaged in various fields of healthcare, is a leading stem cell therapy developer in Korea, which has recently produced companies that benefited from a so-called “bio fever.”
The toughened auditing standards by the Financial Supervisory Service (FSS), however, has caused disagreements about the capitalization of development costs within pharmaceutical and biotechnology companies.
CHA Biotech had previously listed its research and development (R&D) fees as intangible assets in 2017. However, the accounting firm, in step with the FSS’ new policy, audited CHA and did not recognize the charges as valid intangible assets.
The company accepted the auditing opinion, revising its 2017 earnings report from an operating profit of 530 million won ($490,000) to an operating loss of 881 million won ($815,000).
The KRX subsequently listed the company’s stock as “an issue for administration” in step with its policy of designating shares that have listed operating loss for four consecutive years.
Generally speaking, issues for administration are handed out primarily for violations of a duty to disclose impaired capital.
“The case of CHA Biotech seems to be the result of the overarching policies of FSS,” said Park Si-hyung, an analyst at IBK Securities. “As of now, there is a disagreement in the scope of development costs recognized as intangible assets. The new FSS policies can resolve such inconsistency if the supervisory authority, the auditor, and the company can reach an understanding.”
Park noted that the primary deciding factor for whether a company can list its R&D costs as intangible assets is whether the company will be able to “use or sell its intangible assets.”
CHA Biotech emphasized the designation of the issue for administration is a difficulty that all bio-industries are facing due to the strengthening of auditing standards. It claimed the problem does not change the fundamentals of business such as research projects and achievements of the company.
“The external auditor submitted a ‘limited’ audit opinion, as auditory standards for recognizing R&D expenses as the new FSS policy has significantly strengthened on what is and is not intangible assets,” a CHA Biotech official said. “We have activated an emergency management system and a task force to come up with a measure to turn its operating loss into profit to shed its designation as an issue for administration.”
The company will announce its countermeasure next week, the official added.