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Strides Arcolab decides against stand-alone R&D

Strides Arcolab decides against stand-alone R&D
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First Published: Mon, Sep 14 2009. 09 54 PM IST

Updated: Mon, Sep 14 2009. 09 54 PM IST
Strides Arcolab Ltd, a Rs1,366 crore turnover pharmaceutical company, has decided against making its research division a stand-alone entity. The company had in April floated a proposal to hive off its speciality pharmaceuticals business and research and development (R&D) business into two separate subsidiaries. The move was similar to that of Glenmark Pharmaceuticals Ltd, which separated its generics business from its speciality business.
Strides has announced a change in its plans, and will now house R&D and speciality pharmaceuticals together under one company, Strides Specialities Pvt. Ltd. Pharmaceutical companies have a separate R&D subsidiary to isolate the operational business from the research activity. Research requires sizeable upfront investments, with returns coming after a lag. Moreover, a separate entity also facilitates contract research, as clients are comfortable dealing with an independent entity, where there is no conflict of interest. While research offers a kicker to profits, it can be a drag in the short run. Hiving off the business allows investors, with different risk profiles, to choose which business they wish to stay invested in. Earlier, R&D as a separate business was seen as a revaluation trigger. But that enthusiasm has waned, as investors saw the uncertainties involved in pharmaceutical research. Also, a stand-alone research entity will need funding support, till it gets a few successes. Hence, keeping R&D together with the operating business is more beneficial.
A reorganization such as what Strides has planned usually has operational and financial reasons. Operational reasons revolve around better focus, allowing each business to grow independently. Financial reasons could involve a separate listing or, if they are held as subsidiaries, lead to a stake sale to raise funds. Strides has not disclosed how it intends taking this reorganization forward. But its balance sheet gives some clues.
The pharmaceutical company’s calendar 2008 consolidated balance sheet had a debt of Rs1,302 crore against a net worth of Rs415 crore. More than half its debt is in the form of foreign currency convertible bonds, which will have to be repaid if they are not converted into equity. In the June quarter, its interest cost of Rs18 crore ate away about three-fourths of its profit before interest and exceptional items. Raising equity funds, thus, is imperative for the company to lower its debt burden. The stock gained 2% to close at Rs168 on Monday, and is up 8% from its level a month ago.
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First Published: Mon, Sep 14 2009. 09 54 PM IST