Orion Corp: Concerns About Diversification into LegoChem Bioscience

• On 15 January, Orion Corp announced that its subsidiary PAN Orion Corp will purchase a 25.7% stake in Legochem Biosciences for 549 billion won.

• LegoChem Bio specializes in antibody-drug conjugate (ADC) technology. Legochem Bio signed a total of 13 technology transfer contracts amounting to 8.7 trillion won in the past 9 years.

• Most investors in Orion Corp would rather have the company focus on its core confectionery/snack business, rather than expand into high risk/high reward biotech business.

On 15 January, Orion Corp (271560 KS) announced that its subsidiary PAN Orion Corp will purchase a 25.7% stake (9.36 million shares) in Legochem Biosciences (141080 KS) for 549 billion won. Orion Corp (271560 KS) currently owns a 95.2% stake in PAN Orion Corp. The current market caps of Orion Corp and Legochem Biosciences are 3.8 trillion won and 1.5 trillion won, respectively. This acquisition will be carried out through paid-in capital increase and sale of existing shares allocated to a third party.

Many Investors Do Not Like This Deal - This purchase would represent average acquisition price per share of 58,600 won which is 12.3% higher than current price (52,200 won). Orion Corp participated in a third-party allocation paid-in capital increase and was allocated 7,963,283 shares at 59,000 won.

Orion Corp will also purchase 1.4 million shares at a base price of 56,186 won from LegoChem Bio's founder Kim Yong-Joo and President Park Se-Jin, resulting in total of 9.36 million shares. The scheduled payment date is 29 March 2024. Following this news, the share prices of Orion Corp (271560 KS) and Legochem Biosciences (141080 KS) fell 17.5% and 4.7%, respectively on 16 January.

Clearly, investors do not like this deal. On one day, Orion Corp lost 810 billion in its market cap, which is 47% more than Orion Corp's total investment (549 billion won) to purchase a 25.7% stake in LegoChem Bio. Most investors in Orion Corp would rather have the company focus on the F&B sector as one of the most successful confectionery/snack companies in Korea/Asia. In other words, investors would rather diversify themselves rather than have the companies do the diversification themselves.

Now, as time passes by, Legochem Bio could actually turn out to be a successful investment for Orion Corp. However, the timing of when Legochem Bio could experience a meaningful growth in sales and profits remains uncertain. In addition, in the near future (next 6-12 months), this acquisition is likely to drag earnings on Orion Corp.

Since Orion Group entered the bio industry in 2020, this is the largest M&A deal for the Orion Group. In March 2021, a joint venture agreement with Orion Holdings and Shandong Lukang Pharmaceutical called Shandong Lukang Hao Liyou was established. Currently, this JV is conducting in vitro diagnostic clinical trials for colon cancer in China. It also plans to complete a tuberculosis vaccine factory worth 90 billion won. In Korea, Orion Biologics was established in a joint venture with Hisense Bio in December 2022.