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.

Questionable Practices Prompt Share Price Plunge
Shareprice (US$), BMI View Timeline

The manner in which Pharmstandard management has proceeded has lead to accusations of majority shareholder and chairman Viktor Kharitonin trying to force out minority shareholders for less than fair value in order to solidify his control over the company and distil profits further into his capital management arm, Augment Investments. On the back of these decisions, Pharmstandard shares have been downgraded by major investment banks in Russia such as VTB Capital from "Hold" to "Sell", and we expect other equity research analysts to review their recommendations on Pharmstandard in the coming days.

We recently exited our bullish position in mid-June in anticipation of a broad-based selloff in Russian equities. While we were considering re-entering a bullish view on the company when favourable market indications arose, we are now wary of the stock given the corporate governance issues that continue to afflict Russian equities. Corporate episodes such as these highlight the risk of investing in Russia and we believe that the risk-reward profile for entering a position on Russian equities continues to be unattractive. As long as management teams in the country act in the interest of influential shareholders and flout acceptable corporate governance standards, investors will continue to avoid the country, regardless of potential rewards. Business transparency and the alignment of management decisions towards creating value for shareholders must be demonstrated before sentiment warms to Russian companies.

This article is tagged to:
Sector: Pharmaceuticals & Healthcare
Geography: Russia, Russia, Russia, Russia

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