[Edaily Reporter KIM SUNG-JIN ] Lotte Biologics has completed its Songdo Bio Campus Plant No. 1 after investing approximately 1.4 trillion won, but the company now finds itself in a position where it must bear massive fixed costs without having secured enough work to keep the plant running. In particular, depreciation expenses for the building and equipment are expected to increase significantly following the plant’s completion. Industry observers, noting that Lotte Biologics is a latecomer with no track record, predict that “it won’t be easy, even if they slash prices.”

Songdo Plant No. 1 Completed… Depreciation Burden Begins in Earnest

Lotte Biologics completed construction of its Songdo

Plant No. 1

last June and received an occupancy permit. This comes approximately two years after construction began in 2024. The Songdo Plant No. 1 is a 120,000-liter (ℓ) facility for producing antibody drugs; combined with the Syracuse plant in the U.S., Lotte Biologics now has a total production capacity of 160,000 liters. Lotte Biologics plans to expand its total production capacity to 400,000 liters in the long term by adding Plants No. 2 and No. 3 in Songdo.

The Songdo Plant No. 1 is a large-scale facility requiring an investment of approximately 1.4 trillion won, and maintenance costs for the equipment are expected to be substantial following the plant’s completion. The contract development and manufacturing organization (CDMO) business for pharmaceuticals involves large-scale contracts, so increasing plant utilization rates directly translates into profitability.

The issue is that depreciation on production equipment began in earnest with the completion of Plant 1 last June. Construction costs incurred during the building process and production equipment are recognized as tangible assets and expensed as depreciation over their useful lives; the longer the gap in securing new orders persists, the more the burden of these depreciation expenses is expected to snowball.

Although depreciation expense does not represent an actual cash outflow, it is an account that directly affects operating profit. From the company’s perspective, this means it must generate at least enough profit to cover depreciation expenses to be considered profitable.

According to Lotte Biologics’ annual report, depreciation expenses last year amounted to approximately 29 billion won. Since the plant had not yet been completed at that time, most of the investment was recorded as assets under construction, which is why the depreciation expense was relatively small.

However, a significant change in depreciation expenses is expected following the plant’s completion. As of the end of last year, the book value of assets under construction stood at 959.3 billion won, which is roughly comparable to the 1.3 trillion won that Lotte Biologics invested in building Plant No. 1.

In fact, the “agreed amount for the acquisition of land and production facilities for the construction of the Songdo Bio Plant” listed in the notes to the audit report is 1.2326 trillion won. Considering that the acquisition cost of the land was 258.5 billion won, the value of tangible assets subject to depreciation is estimated to be approximately 1 trillion won.

Lotte Biologics specifies in its audit report that it depreciates tangible assets using the straight-line method based on their nature: buildings over 40 years, structures over 10–20 years, and machinery and equipment over 5–15 years. While it is unclear which category the assets currently under construction will fall into, even if they are conservatively classified entirely as buildings, the depreciation expense is estimated to reach twice the current level. #Based on Samsung Biologics’ ratio of tangible assets—where machinery and equipment account for 44%—an application of this ratio to Lotte Biologics suggests that depreciation expenses could approach 100 billion won.

A source familiar with Lotte Biologics’ situation said, “It is true that depreciation expenses will increase as the plant is completed, but the exact amount will likely be determined around year-end through an external evaluation by an accounting firm.”

No

Major Orders

Yet…

Lotte’s Entry Strategy as a Latecomer

Although we are already approaching the fourth quarter of this year, there has been no news of orders that could support such large-scale production capacity. Lotte Biologics has been making an all-out effort to secure orders—including signing a contract manufacturing (CMO) agreement with Japan’s Rakuten Medical earlier this year—but the orders secured so far have been only small-volume clinical-stage contracts, far from the scale required for large-scale commercial production.

It is reported that Lotte Biologics is currently conducting sales activities to secure large-scale orders from “Big Pharma.” The company plans to secure one or two major orders within this year to build a track record as quickly as possible. To this end, it has taken a bold move by bringing forward the plant completion date and the commercialization schedule.

A Lotte Biologics official explained, “We received requests from clients to bring forward the plant’s completion date,” adding, “In response, we have moved up the completion date—originally scheduled for the end of this year—by six months to quickly establish a foundation for securing orders.” Currently, Lotte Biologics is conducting trial runs and production facility validation procedures with the goal of meeting the “Good Manufacturing Practice” (GMP) standards by November of this year.

The situation could become more complicated if major orders from big pharma companies are delayed beyond expectations. This is because, even though the plant is complete, operating losses could widen once depreciation expenses and fixed costs begin to impact the bottom line while production volumes remain insufficient.

The fact that Lotte Biologics is a latecomer poses a challenge. Since established global CDMO companies such as Samsung Biologics and Lonza have already secured large-scale production facilities and a proven track record, Lotte Biologics must demonstrate unique strengths to surpass them.

Industry observers predict that Lotte Biologics will adopt a strategy of lowering its contract prices to gain initial market entry. However, given that production capacity in the global pharmaceutical CDMO market is already sufficient and large-scale plants are being built one after another in Korea as well, there are also skeptical views as to whether this strategy will actually work.

An industry official stated, “Samsung Biologics was able to enter the market relatively quickly thanks to the global brand name ‘Samsung,’” adding, “Even if Lotte sacrifices margins to secure clients, it won’t be easy because the infrastructure is already in place for other companies to produce products safely and affordably.”