Aurobindo Pharma Ltd, the mid-sized drug maker, is open to a merger or a partial buyout if its management gets to retain control and drive its India-centric growth strategy, says its chairman.
But the company is not currently in discussions with any suitor, clarified Aurobindo chairman P.V. Rama Prasad Reddy, seeking to scotch rumours of an imminent deal, which has been driving the company’s shares up.
Shares of Aurobindo hit a 52-week high of Rs769.70 on 11 June. On Tuesday, they were trading at Rs721.95, down 2.33%, or Rs17.25. The shares were trading as low as Rs467.90 last June. At Tuesday’s closing price, Aurobindo is valued at over Rs3,850 crore.
However, Aurobindo’s management is not interested in selling its stake to international pharmaceutical majors looking for a foothold in India to take advantage of lower manufacturing and drug developments costs for at least the next three to four years, Reddy maintained.
“We are not interested in selling off our stake and exit totally from the company,” he said. “We may consider attractive proposals for partly being acquired provided it is a better proposition and augments shareholders’ wealth.”
This is the first time that Aurobindo’s executives have said that they are open to partnering large strategic or financial investors after strenuously denying several times in the past that the company was up for grabs by global drug makers.
“We are open to offer a significantly high minority stake to strategic investors but we would like to retain our majority holding in the firm and play an active role in the company’s growth story,” said Reddy.
He said Aurobindo’s revenues should top $1 billion, or about Rs4,100 crore, in the next two to three years, and expects profits to touch Rs1,000 crore by then. The firm closed fiscal 2007 with Rs69.37 crore net profits on revenues of Rs1,502 crore.
Reddy, his family and co-promoters hold 55.69% of the Rs26.67 crore equity in Aurobindo as of a March filing, with institutional investors holding 38.35% and public shareholders the balance 5.96%.
Key entities among the institutional investors include Fid Funds Mauritius, Standard Chartered Pvt. Equity Mauritius, Quantum Mutual Fund, Morgan Stanley, Life Insurance Corp., Goldman Sachs, Reliance Capital, Merrill Lynch and India Fund Inc.
An analyst said Reddy’s open mind towards global tie-ups would help Aurobindo expand in a business that is increasingly global.
“The funds inflow would bring in liquidity into the system and enable Aurobindo retire a significant part of its debt burden. Further, if the partner is an MNC (multinational corporation) pharma giant, then Aurobindo would have access to its readymade markets overseas,” said Dev Jyoti, an analyst with securities research firm Global Absolute Pvt. Ltd. Aurobindo had total loans of some Rs876 crore as of March 2006, the last audited figures publicly available.
The Aurobindo chairman’s statement comes close on the heels of the company’s failed attempt to forge an alliance with buyout firm CVC Capital Partners (Deutschland) GmbH to acquire assets of Germany’s Merck KGaA. The long-term aim behind the association was to offer CVC a significant minority stake in Aurobindo at an enhanced valuation, if the Merck bid succeeded, with a sizeable chunk of the Merck unit’s drug manufacturing shifting to the Hyderabad company’s low-cost facilities in India.
“If a similar proposal comes our way, we will definitely consider it. At present, the company is on the high growth trajectory... We expect our revenues and profits to shoot up significantly by between 30% and 50%,” Reddy said.
As against an average volume of far less than 100,000 shares changing hands daily, the Aurobindo stock saw nearly 1.2 million shares traded on 4 June, 161,000 on 7 June and 388,000 shares on 8 June. Some Rs83.75 crore worth trades were recorded on 4 June on account of Merlion Fund, run by Standard Chartered, reducing its 6% stake by half, selling to Reliance Capital, Reddy said.
“The primary reason that I see for the stock price moving up could be the drastic rise in prices of penicillin G, the key raw material for making antibiotics. Since Aurobindo manufactures penicillin G at its Chinese facility for captive use to produce cephalosporins (a widely prescribed class of antibiotics) at its Indian facilities, the markets seem to be expecting better price realizations,” he said.
Meanwhile, Aurobindo said it has plans to expand using around $110 million left over from $260 million worth foreign convertible bonds raised over the last two years. The plans include setting up a $50 million facility at Jadcherla, around 30km from the upcoming Hyderabad International Airport, to take off next year, and acquiring three drug marketing companies in Portugal, Spain and Italy for about $5 million each in the next two months.
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