Celltrion's bid to merge with unit likely to test owner's leadership

Celltrion Group Chairman Seo Jung-jin speaks during a press conference on the group's merger plans in Seoul, Oct. 25, 2023. Yonhap

Biosimilar giant Celltrion Group has taken its first step toward merging its flagship biopharma company, Celltrion, with chemical drugmaker Celltrion Pharm as part of a group reorganization endorsed by its founder and Chairman Seo Jung-jin.

As part of Seo's 2020 plan to integrate the group's three listed units, Celltrion absorbed its global marketing unit Celltrion Healthcare in January after getting favorable responses from shareholders. This time, however, the merger proposal is facing protests from minor shareholders who are questioning Pharm's valuations.

Celltrion announced Wednesday that it established a committee to review the feasibility of the proposed merger between Celltrion and Pharm.

The committee will consist of outside directors from both companies' boards, and Celltrion said they will "independently review whether the merger should be pursued." In doing so, the committee will conduct surveys with shareholders over the merger plan until Aug. 12 and will reflect the results in its considerations.

"Celltrion Group believes that absolute agreements from both companies' shareholders are essential for the merger," the company said.

"Chairman Seo and Celltrion Holdings, as the major shareholders of Celltrion, will honor their promise to maintain neutrality and will raise their opinion after the survey is completed."

Celltrion Holdings and Seo hold 21.96 percent and 3.81 percent, respectively, in Celltrion. Celltrion holds 54.81 percent of Pharm.

An exterior view of Celltrion’s second factory in Incheon / Courtesy of Celltrion

The merger plan is in line with Seo's 2020 initiative to integrate the group's three listed firms to make Celltrion a global pharmaceutical giant, which would then be valued at up to 50 trillion won ($36.66 billion).

It was also being seen as a tactic to defy criticisms and controversies over trading within its affiliates. Since Healthcare was an exclusive marketer and distributor of Celltrion's biosimilar products, the biopharma industry has been criticizing this structure as an unfair trading practice.

Additionally, the three-way merger was believed to address accusations of inflated sales figures, as revenues were recorded on the books of both companies whenever Healthcare purchased products from Celltrion for overseas sales.

However, the plan did not make immediate progress. Less than a year after revealing the plan, Seo announced his retirement in March 2021 citing the necessity to separate ownership from management.

The three-way merger plan gained traction only after Seo resumed the chairmanship in March 2023, citing the challenges facing Celltrion Group. In January, Healthcare, which was the third-largest company by market capitalization on Korea's secondary KOSDAQ market, merged into Celltrion at a ratio of 100 Healthcare shares for 45 Celltrion shares. This plan gained approvals from more than 95 percent of both companies' shareholders.

Following the merger, Seo revealed in January a plan to list Celltrion Holdings on the NASDAQ by the end of the year and use the money gained through the initial public offering to organize a global health care fund worth 100 trillion won. Seo holds an over 98 percent stake in Celltrion Holdings.

Unlike the previous merger, the proposal to integrate Pharm into Celltrion is facing doubts.

On July 23, a group of Celltrion minor shareholders ran an ad in a local economics newspaper protesting the Celltrion-Pharm merger, saying, "600,000 minor shareholders oppose the merger, which will harm shareholder value."

The group who proactively supported the Celltrion-Healthcare merger, said the previous merger could be "justified for the purposes of addressing accounting fraud and improving cost-efficiency," but the ongoing plan has "no such cause."

The shareholders also noted that Pharm's shares are overvalued, citing its price-earnings ratio (PER) that hovered over 230 on Thursday. PER is the ratio of a company's share price to its net profit, indicating whether it is overvalued or undervalued. Celltrion's PER was approximately 85 on Thursday.

Along with minor shareholders, the National Pension Service (NPS), which holds a 6.24 percent stake in Celltrion, is also expected to play an important role in Celltrion's merger bid. During the merger between Celltrion and Healtchare, the NPS abstained from voting, considering its rights to demand Celltrion to purchase the shares at a set price, but did not exercise it.