Pharmstandard Edges Out Minority Shareholders For A Discount
BMI View: Our decision to remove our bullish view on Pharmstandard has proven well timed in light of the company ' s sale of its OTC division and acquisition of a Singaporean pharmaceutical company. T he management at Pharmstandard ha s effectively edged out minority shareholders and consolidated ownership for less than market value. While we originally viewed the company as a vehicle to gain exposure to our bullish Russian pharma view, in light of these developments, we believe the stock is best avoided. Corporate episodes such as these highlight the risk of investing in Russian equities a s well as general wariness of investors towards Russian-owned firms.
BMI has viewed Russia as the one of the most promising emerging market in the Central and Eastern European region and indeed globally on account of favourable sector indicators. Overall pharmaceutical sales have posted year-over-year, high single-digit growth in US dollar terms, which we expect to continue in the long term. The combination of an ageing population and a large, unaddressed disease burden have proven to be significant factors in accelerating consumption of pharmaceutical goods. Moreover, the Russian state has become a significant purchaser of expensive and patented medicines , and we expect this trend to continue as drug reimbursement is expanded to all Russians in the medium term.
We previously highlighted the Russian drugmaker Pharmstandard as a means to gain exposure to these bullish sector fundamentals. However, recent developments have lead us to recommend that the stock best be avoided. Although the fundamental bullish view on the sector remains, we believe the risk-reward profile for opening a position has taken a turn for the worse. Pharmstandard initiated plans to separate its OTC business into a separate legal entity, despite shareholder concerns. At the same time, the company has made overtures to purchase a Singaporean drugmaker, presumably from the proceeds of selling its OTC division. M inority shareholders who do not agree to these plans have been given an ultimatum of accepting a significantly discounted price for their stakes (US$16.50 per share) or face a more significant loss . Shareholders who do not accept this offering will be left holding shares in the shell company and a stake in the OTC unit, which would be an unlisted and highly illiquid asset. With trading volumes generally low and demand still muted for Russian equities, divesting Pharmstandard would spur a run on the stock, accelerating losses for shareholders wishing to exit. Therefore, affected shareholders are left with little choice but to settle at the offered price.
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