When South Korea’s Samsung BioLogics announced its plan to list in the domestic market, it offered investors a deal that — on the surface — looked like an unappealing proposition.
It was not the long-established corporate titan that Korean investors are used to. In fact, it had been operating less than six years. It had less than $30 million of cash last year. Perhaps most importantly, it was unprofitable until 2015, when it turned in an extremely thin profit of $810,000 for the entire year.
But on Friday, Samung BioLogics priced the country’s third largest initial public offering in history, raising W2.2 trillion ($2 billion) from a deal that got more than $6 billion of demand. That secured the company an $8 billion valuation, making it larger than household names like Lotte Shopping and LG Electronics.
Samsung BioLogics provided a novelty in Asia’s markets, where unprofitable companies rarely IPO at a decent valuation, in part because of stringent listing rules. But although the deal presented hurdles to investors, it clearly also whet their appetites.
The right sector
“I have no idea how I can value the company,” a fund manager told FinanceAsia before the IPO. “For people who believe in the business, they need to have some imagination as to how the company will grow in the very long-term.”
Samsung BioLogics’ unprofitability meant that the earnings valuation methodologies that Asian investors typically rely on were no longer applicable. They were forced to get creative, adopting the mindset of US investors that have embraced a swathe of unprofitable early-stage companies such as Twitter, Line, Groupon and LinkedIn.
For investors sticking to the old methods, the deal was an easy one to turn down. At $8 billion, Samsung BioLogics is valued at nearly 10,000 times its 2015 earnings. But enough investors had faith in the company’s long-term growth prospects to accept such a heady valuation.
This is partly because of the sector. Besides technology companies, pharmaceutical firms are widely seen as another group that could dramatically change how the world works. As the pitch goes, while tech firms can change consumption behaviour, pharmaceutical firms can change how people live — and indeed, how long.
In the case of Samsung BioLogics, investors are betting on the future of biologic medications, in particular.
Unlike conventional drugs, which are manufactured through chemical synthesis, biologic drugs are manufactured using living organisms such as plant or animal cells. Apart from treating diseases, many biologics are used to prevent or diagnose diseases, making them much more valuable than conventional drugs.
Investors are betting that Samsung BioLogics will be a key beneficiary of the growth of this market, since it wants to be the world’s largest manufacturer of biologic drugs. To support that potential growth, it is currently building its third biopharmaceutical facility in Songdo, with the aim of doubling production capacity to 360,000 litres by 2018.
Samsung BioLogics predicts earnings will grow at 50% annually until 2020, an eye-catching rate even when compared to some of the world’s fastest-growing pharmaceutical businesses.
But they still only explains part of the company’s appeal. Its low earnings base means it is unlikely to be hugely profitable even if it grows that fast. In any case, such heady projections do not appear enough to support such an aggressive valuation.
The right connections
Some analysts therefore suggest investors are buying into Samsung BioLogics in the hopes that the company will benefit from the restructuring of Samsung Group, whether in the form of capital support or an asset injection.
The conglomerate, which according to some estimates accounts for one-fourth of South Korea’s gross domestic product, is in the middle of a once-in-a-generation change in leadership. Lee Jae Yong, heir apparent to Samsung Group, has started a massive campaign to reorganise the internal structure of the group since his father and group chairman Lee Kun-hee was hospitalised in May 2014.
The group is also diversifying its businesses away from its heavy reliance on electronics and information technology. Senior management may be prompted to expedite the process following the recent large-scale recall of Samsung Galaxy Note 7 smartphones on safety concerns.
Samsung Group has identified biopharmaceuticals as one of its future growth drivers alongside solar batteries, rechargeable batteries and light-emitting diodes. With such strong support from a domestic titan, it should come as no surprise that investors were keen to by a deal that — on a stand-alone basis — would perhaps have been seen as too young, too small, and not profitable enough.
Samsung BioLogics could also enjoy a revaluation following the listing of Samsung Biopeis, its 91%-owned subsidiary which is expected to go public in the US next year.
Samsung BioLogics set the final price of its IPO at the top end of the indicative price range of W113,000 to W136,000. It sold 11 million new shares while Samsung Electronics, the company’s second largest shareholder, sold 5.5 million shares.
It was the third largest IPO in South Korean history after Samsung Life’s $4.4 billion IPO and Lotte Shopping’s $3.5 billion deal.
The joint bookrunners of the IPO were Citigroup, Korea Investment & Securities, NH Investment & Securities, JP Morgan and Credit Suisse.
