The stock trading suspension of Samsung BioLogics due to the alleged accounting fraud is likely to send shock waves to the entire pharmaceutical and biotech market, analysts said.

The Securities and Futures Commission under the Financial Services Commission ruled on Wednesday that the contract drugmaker intentionally violated accounting rules to inflate the company’s value in 2015, before the initial public offering in 2016.

The financial regulator suspended the trading of shares of Samsung BioLogics, recommended dismissing CEO, fined 8 billion won ($7 million), and sent the case to state prosecutors.

The securities panel said Samsung BioLogics arbitrarily used its accounting standards to secure legitimacy in changing the stake in its subsidiary Samsung Bioepis. The committee particularly noted that the company’s action was “deliberate.”

Accordingly, the regulator told the Korea Exchange to review delisting of Samsung BioLogics. Under the listing rules, the stock market operator will examine the continuity of the business, management transparency, social contribution, and the impact on investor protection. Then, it will decide on either a resumption of share trading or delisting.

Immediately after the regulator’s ruling, Samsung BioLogics released a statement, saying it would file an administrative suit.

“We express deep regret over the decision of the Securities and Futures Commission. We are confident that the company didn’t violate accounting standards,” Samsung BioLogics said.

Not only the 2016 review of the Korean Institute of Certified Public Accountants but a meeting attended by the Financial Supervisory Service officially confirmed that the company’s accounting did not have any problem, it added.

Will trading suspension hurt investment sentiment?

Although Samsung BioLogics vowed to file a suit against the financial regulator to contain jittery investment sentiment, the negative impact from the trading suspension is likely to linger on for a significant period, analysts said.

The biosimilar maker’s market capitalization stood at 22.13 trillion won ($19.6 billion) as of Wednesday, the sixth-largest in the main bourse KOSPI. Despite the regulator’s review of trading suspension for several days, retail investors continued to buy shares of Samsung BioLogics for five consecutive trading days since Thursday last week.

While institutional investors sold off Samsung BioLogics shares, individual investors went on a buying spree. For the past five consecutive trading days, retail investors net-bought more than 430,000 shares of the company.

It will take some time until the decision on delisting, but investors are likely to fear uncertainty over the biopharmaceutical behemoth with 22 trillion won market cap. Retail and institutional investors own over 90 percent of shares.

“The financial markets seem to have been surprised by the regulator’s ruling because a majority of opinions did not expect that it would see it as intentional accounting fraud. I’m trying to be careful in predicting whether the company will be delisted,” a financial source said.

He said Daewoo Shipbuilding & Marine Engineering (DSME) could be a good case for comparison.

The regulator punished DSME due to 5 trillion won worth of accounting fraud but it was not delisted. Instead, the stock trading of the company was suspended for one year and three months.

“The latest case of Samsung BioLogics is more significant than that of DSME and it is drawing more public attention,” the source said. “For the past two days, retail investors purchased its shares a lot. If the company avoids delisting, its shares could make a rebound.”

Pharmaceuticals, biotechs to weather the storm

The suspension of Samsung BioLogics transactions will have a negative impact not only on the biotech sector but other pharmaceuticals centering on chemicals, analysts said.

The biotech industry worries about a contraction of investment sentiment the most. As biotech firms focus on research and development, they are desperate to attract investment.

If a company like Samsung BioLogics, which runs a global business, has its image tarnished due to accounting fraud, it would be difficult for other local biotech firms to attract investment from overseas, industry officials said.

“I’m worried that foreigners’ view on the domestic biotech industry could turn negative,” said an official in charge of investor relations at a mid-size biotech company. “The biotech sector needs to expand business in the global market, but we have just added another obstacle.”

Chemical drug-based pharmaceutical firms are also on an alert. In investors’ minds, pharmaceuticals and biotech firms move in a similar direction.

Others said investors should restrain from pharmaceutical stock trading until the regulator decision over delisting.

“Samsung BioLogics’ accounting fraud controversy is an individual case in the biotech sector, but investors might find it difficult to recognize it as a separate issue,” an analyst said. “As the company’s case could affect the biotech industry, investors would do better to be careful in trading stocks in the pharmaceutical and biotech sector.”

The review of delisting Samsung BioLogics could be decided within 15 business days. However, a further investigation might extend the time by another 15 business days.

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