Why Samsung Electronics Should Say No to Drugs

Samsung Electronics is known for its smartphones, TVs and memory chips. Now it wants to tackle biopharmaceuticals.
Samsung Electronics is known for its smartphones, TVs and memory chips. Now it wants to tackle biopharmaceuticals.

Samsung Electronics is best known for its smartphones, TVs, memory chips and liquid crystal displays. So the news that the company is entering the biopharmaceuticals business seems like quite a leap.

On Friday, Samsung Electronics announced a joint venture with biopharma-services company Quintiles Transnational and two other Samsung units. The move is part of a broader Samsung Group initiative, announced back in May, to expand into five new businesses by 2020.

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Samsung Electronics will own a 40% stake in the 300 billion won, or $266 million, joint venture. Samsung Everland, which operates resorts, food service businesses and environmental development, will also take a 40% stake, while Samsung C&T, an engineering, construction, investment and trading company, and Quintiles, which helps pharmaceutical companies develop and commercialize drugs, will each own a 10% stake.

Samsung Electronics representatives were not immediately available to comment on the specific role Samsung Electronics will play in the venture, and a Quintiles spokesman referred all calls to Samsung.

Is Diversity a Distraction?

But a move into biopharmaceuticals could prove to be a distraction to Samsung Electronics, the world's largest technology manufacturing company.

The company, which is coming off a year of record revenue and net profit, already has plenty of challenges to tackle in its core business: It's taking on Apple with its Galaxy smartphones, tablets -- and now its ultra-thin laptop -- and working to boost profit margins suffering from a television price war, as well as weak prices for memory chips and LCD panels.

It seems like Samsung Electronics could make better use of its time, effort and money by focusing on some of the other new industries its mother ship is interested in, such as solar power, second-generation rechargeable batteries and light-emitting diodes (LED).

So far, it looks like investors may be nervous about the move into pharmaceuticals too. According to Bloomberg, Samsung Electronics shares fell 0.3% to 926,000 won, or $822 a share, at the close of trading on the Seoul exchange, while the Korea Kospi index rose 0.7%.

Big Plans in the Pipeline

The joint venture is part of Samsung Group's larger goal of investing 23 trillion won, or $20.4 billion, into five new industries -- including medical devices -- over the next decade. Of that $20.4 billion investment, nearly 10% will go to bio-pharmaceuticals investments, Samsung says.

Under the joint-venture agreement, the companies will begin building a biopharmaceutical production plant sometime before the end of June. As a result, Samsung will become a contract manufacturer of biopharmaceutical drugs, which will be made from living cells and aim to treat cancer and arthritis patients, with production targeted for 2016.

According to Samsung's blog post on the announcement, it has even larger plans in the works:

And by combining the expertise gained from contract manufacturing and biosimilar production, we will aim to eventually develop new biopharmaceutical products of our own.

Our long-term expansion will be also supported by the synergy from different Samsung businesses. The experience and research capability of Samsung Medical Center, a leading hospital and research chain, and the medical equipment business based on the Samsung Electronics' technology, will be combined with the biopharmaceutical business, enabling us to provide integrated medical services.

Leveraging Expertise

Samsung Group is apparently ready to recast Samsung Electronics, changing it from an industry titan in chips, telecommunications and digital media and other consumer friendly devices to something more diversified. As the company noted in its fourth quarter earnings announcement: "Samsung expected price competition to intensify in the consumer electronics, IT and mobile device markets in 2011."

Make no mistake, diversifying into a growth area can be a great idea. But picking a growth area that takes advantage of existing expertise is even better, and so far, that doesn't appear to be what Samsung is doing here.