The Hindu Business Line : Pharma promoters cede control to grow

Orchid Chemicals’ promoter Mr K. Raghavendra Rao agreeing to a ‘business alliance’ with Mr Malvinder Singh’s Ranbaxy may have tempered the excitement over the takeover drama surrounding this mid-sized pharma company for now.

But in a country where promoters are known to be wary about losing control, promoters of mid and small-sized pharma companies have seen their equity stakes reduce steadily over the past five years. Over 70 companies in the pharma space now have promoter holdings of less than 30 per cent, going by their latest shareholding patterns!

Paring stake

Of the 180 listed pharma companies, 100 have seen their promoters cede their equity stake in the past five years. Sixty of these have seen promoter stakes pared by a significant 5 per cent or more. Companies such as Aurobindo Pharma, Marksans Pharma and Vimta Labs have seen their promoter holdings fall by 6 to 21 per cent over a five-year period.

The continuous demand for capital infusion to build manufacturing facilities, long gestation periods and huge fund requirements for R&D could be possible reasons why aspirational entrepreneurs in the pharma space have had to dilute stakes in their companies to scale up in size.

Aurobindo Pharma, for instance, invested about Rs 250 crore annually (on an average) in fixed assets between 2003 and 2007, even as the cash generated by its operations averaged about Rs 50 crore a year. This explains the need for raising fresh capital.

The average equity base of 15 well-known pharma companies that have seen promoter holding fall by 5 per cent or more, has swelled by 6 times between 2003 and now. Over the same period, the gross block (indicating the manufacturing assets) of these companies has more than doubled, showing that funds raised have been used to build capacities.

What has caused the dilution in promoters’ stake? Preferential issues and convertible warrant issues, apart from old fashioned stake sales to private equity or foreign investors, are the most popular means through which pharma companies have raised funds.

In analysis shows that mid- and small-sized pharma companies dominate the list of companies where promoters have ceded sizeable stake.

These include the likes of Lupin, (promoter holding down by 16 per cent), Jubilant (11 per cent), Glenmark Pharma (11 per cent) and Sterling Biotech (12 per cent).

Contract manufacturer Jubilant Organosys opted for an outright stake sale not once but twice, once each in 2004 and 2005, to Citicorp and General Atlantic. R&D focussed Glenmark Pharmaceuticals has seen a dilution in promoter equity due to conversion of debentures issued to Mauritius-based CDC Financial Services.

Lyka Labs, Sterling Biotech and Elder Pharma have floated global depositary receipts (issued to non-resident investors against the issue of ordinary shares) to raise funds.

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