[At a Crossroads for Listed Companies] DigitalOptic, Suspicion of Inflated Valuation of NobleBio Licensing Rights②

More than Half of NobleBio Products Recalled Last Year
DigitalOptic Did Not Consider Recall When Acquiring Distribution Rights
CB Issuance Loss Fully Passed on to Minority Shareholders

[Asia Economy Reporter Jang Hyowon] When Digital Optic, a KOSDAQ-listed company, acquired the distribution rights from its largest shareholder Noble Bio last January, it was found that the fact that Noble Bio’s major product was subject to a ‘recall’ last year was not reflected.

Before transferring the distribution rights to Digital Optic, Noble Bio recalled all of its COVID-19 specimen collection swab (cotton swab) products, which accounted for more than half of its total sales, in December last year. This was because the products were manufactured by an outsourced company that did not comply with quality control standards.

However, the valuation report on the distribution rights of Noble Bio reviewed by Digital Optic did not include this information. As a result, Noble Bio was able to acquire Digital Optic convertible bonds (CB) worth 38 billion KRW without any cash payment.

Digital Optics homepage capture.

Distribution Rights Valuation Did Not Reflect Noble Bio Product ‘Recall’

According to the Financial Supervisory Service’s electronic disclosure on the 20th, Digital Optic issued CB worth 38 billion KRW to Noble Bio on January 26. The purpose was to acquire domestic and international sales rights for virus specimen collection swab products manufactured by Noble Bio.

Earlier, on January 13, Digital Optic and Noble Bio signed a memorandum of understanding (MOU) to jointly promote business for all Noble Bio products, including specimen collection swabs. Digital Optic issued CB worth 38 billion KRW to Noble Bio in exchange for exclusive distribution rights to Noble Bio’s products.

The reason for setting the distribution rights at 38 billion KRW was the expectation that distributing Noble Bio’s products would generate a total operating profit exceeding 60 billion KRW over the next three years.

According to an external evaluation opinion on the distribution rights, Digital Optic projected sales of 230.8 billion KRW this year, 242.5 billion KRW next year, and 254.3 billion KRW in 2023 from selling Noble Bio’s products. The estimated operating profits were 20 billion KRW this year, 20.8 billion KRW next year, and 21.5 billion KRW in 2023. The discounted present value of these profits amounted to 38 billion KRW.

Digital Optic’s projection of annual sales exceeding 200 billion KRW was based on Noble Bio’s sales of 135 billion KRW last year. During the COVID-19 pandemic last year, sales of Noble Bio’s swab products increased approximately 27 times from 5 billion KRW the previous year.

The problem is that more than half of last year’s sales were products subject to ‘recall’. According to the Ministry of Food and Drug Safety, Noble Bio conducted a voluntary recall of the product ‘NFS-1’ in December last year. The company explained that this was due to outsourcing to a company not listed in the product standard due to non-compliance with quality management.

Sales of ‘NFS-1’ last year were approximately 80 billion KRW, accounting for 59% of Noble Bio’s total sales. Despite this significant event affecting sales, Digital Optic’s valuation report on Noble Bio’s distribution rights did not reflect it.

In fact, from the first quarter of this year, sales of Noble Bio products fell far short of expectations. According to the sales estimated at the time of the distribution rights valuation, at least 60 billion KRW in sales per quarter should have come from Noble Bio products, but the first quarter of this year recorded only about 13 billion KRW.

Noble Bio Secured 38 Billion KRW CB Without Cash

The reason Digital Optic aggressively purchased the distribution rights is interpreted as being because Noble Bio is the largest shareholder. On January 4, Noble Bio became the largest shareholder of Digital Optic through a paid-in capital increase of 5 billion KRW. As its first move after becoming the largest shareholder, Noble Bio transferred the distribution rights of its products to Digital Optic.

With the CB received in exchange for the distribution rights, Noble Bio can significantly expand its control. At the time of acquiring Digital Optic, Noble Bio became the largest shareholder with a 5.81% stake (currently 736,377 shares).

However, if the CB received instead of the distribution rights is converted into shares next January, Noble Bio can acquire 37.1% (7,487,684 shares) of the stock. Additionally, if the CB worth 10 billion KRW that it holds is also converted, it will secure a total stake of 45.9%.

Excluding the distribution rights, Noble Bio effectively obtained 10,161,069 shares of Digital Optic stock for 15 billion KRW in cash. This equates to 1,476 KRW per share, which is 66.5% lower than the closing price of 4,400 KRW on the 18th.

As the largest shareholder, Noble Bio can acquire shares and realize profits through the intangible asset of distribution rights, but the dilution of share price due to the increased number of shares is expected to be borne entirely by ordinary shareholders.

Regarding this, Digital Optic stated, “The distribution rights were processed after receiving proper evaluations from two accounting firms.”