The Financial Supervisory Service has begun to inspect Celltrion Healthcare’s sale of the domestic distribution rights to Celltrion, to determine whether the act was related to accounting fraud, drawing keen attention from the industry.
Industry executives say it is common for pharmaceuticals to count revenues from the sell-off of distribution right as sales.
Celltrion Healthcare, which owned the selling right of Celltrion’s biomedicines, sold out the distribution right to the latter at 21.8 billion won ($19.2 million), and appropriated the revenue as its sales, in June.
Some analysts took issue with the sell-off, however, asking questions ranging from whether the amount of 21.8 billion won was appropriate to whether the sell-off of distribution right should be seen as an operating activity. If not, the accounting practice was not justifiable, the analysts point out.
“In accounting, we regard only revenue continuously generated from principal business purposes as sales (caused by operating activities),” a public accountant said. “We usually do not count the sell-off of the domestic distribution right as sales. There might be pros and cons to whether the act was an accounting fraud but more experts than not regard it as problematic.”
Not a few experts say, however, they could not understand the FSS’ decision.
“It may be right to say the sell-off of domestic sales right does not generate revenue continuously, but it is also natural to count revenue from the sell-off, including the down payment, as sales,” a financial officer at a biopharmaceutical company said. “The same can be said about the contract of manufacturing right and other technology exports. Similar accounting practices have been continuously done in this industry.”
Celltrion Healthcare is an affiliated firm of Celltrion but is a separate corporate entity from its parent company, and so there can be no problems, the financial official went on to say. “It is hard to understand if the regulators took issue with the company’s recording of the revenue from the sell-off of the domestic distribution right as sales, instead of non-operating income,” he added.
Yet others suspect the critical issue of the regulatory inspection was not the Celltrion Healthcare’s counting of revenue from the distribution right as sales.
“Some industry insiders had continuously raised suspicion that Celltrion used to blow up its sales by inflating down payment amount or push-driven transactions among its subsidiaries,” a PR official at another biopharmaceutical company said. “Therefore the recent inspection might have something to do with these problems. However, the regulators will find it hard to take issue with the accounting practice of the domestic distribution right sell-off alone.”
Celltrion Healthcare has maintained a position that the disposal of domestic distribution right was aimed to make its marketing structure in more efficient ways. Nor the accounting practice had violated any laws, the company says.
“In the past, Celltrion Healthcare owned the global distribution rights of Celltrion’s products. As far as their domestic distribution was concerned, however, the sales had been made through the contract with Celltrion,” a Celltrion Healthcare official said. “The previous selling structure (of reselling Celltrion’s distribution right after buying it from the same company) was very complicated, so we had to simplify it.”
The disposal of domestic distribution right was intended to focus more on overseas markets, in which Celltrion Healthcare has a competitive edge, the official explained.
He also pushed aside the suspicion that the accounting act was aimed at solving the company’s operating loss.
“In the third quarter of this year alone, the company recorded an operating profit increase of more than 70 percent (with 20 billion won compared to 11.5 billion won in the same quarter of 2017),” the official said. “It was not necessary for us to overstretch the accounting because of operating loss in just one quarter.”
However, Celltrion Healthcare’s operating profit stood in the second quarter stood at 15.2 billion won, meaning the company sustained a loss if the sell-off amount of 21.8 billion won is excluded.
“The discussion on the sell-off of domestic distribution right had been going on since last year. The decision on the disposal came from the conclusion that we should concentrate our marketing capacity on global business, and had nothing to do with the operating profit issue.
<© Korea Biomedical Review, All rights reserved.>