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ShareWhat was perceived to be an easy option to raise funds through foreign currency convertible bonds (FCCBs) two to three years ago is turning out to be a nightmare for Indian drug makers.
Companies such as Aurobindo, Wockhardt, Orchid and Jubilant had individually raised anywhere between $100 million and $200 million for their expansion activities, but are now trapped as the bond conversion dates are approaching in the next few quarters and the current share prices are nowhere near the agreed values.
As such, there will be heavy redemptions and these companies may need to fork out disposable cash thereby impacting their balance sheets adversely. While Indian companies were absolutely correct in pursuing their expansions, no management wizard could guess the rapid fall in the global stock indices and the misfortunes that accompanied it. To play the devil's advocate, all that Indian drug companies wanted to do was to explore an easy route for finances without any encroachment on their equities.
Aurobindo has an enviable position of having over eleven US FDA approved plants. It needed to expand its operations in anticipation of a surging demand from the global generics sector. The company had been streamlining its huge manufacturing setup and has been filing ANDAs or marketing approvals in the US very briskly.
Remember, from time to time, Aurobindo's name springs up as an acquisition target for multinational companies. That might become a big discussion point in the coming days as it grapples with the bond conversion issue and it is entirely possible that some top pharmaceutical company may cease the opportunity and strike a deal at a massively stripped down valuation.
So, while nothing is wrong with the fundamental business models of the companies that took the FCCB shelter, the current valuations being given to these stocks are unfortunate and delinked from the operational standpoint. Though it may appear to be unwise to hammer down the companies that took FCCB borrowings, on their part, investors may not be too keen to take more risks in light of the unprecedented global meltdown that continues to deepen every passing day.
Aurobindo's rapid expansion plans mirrors Jubilant's intentions. Having followed an aggressive acquisition-led global expansion model, Jubilant had been buying contract research and manufacturing companies in the US, Europe and Canada. Jubilant today stands among the most recognised contract manufacturing companies having a number of partnerships with big multinational pharmaceutical companies.
With revenues upwards of $500 million annually in less than fifteen years, Jubilant's chemicals to pharmaceutical foray may be termed as the quickest one in the industry. Its recent display at the global CPHI exhibition at Frankfurt drew hordes of crowd and was one of the best among the bunch of companies that participated across the globe.
However, Wockhardt's has perhaps been the saddest case. With an overwhelmingly strong presence in Europe, the company had to work on fast expansions in US, too. Having raised close to $140 million, it never appeared to be an uphill task for repayment of the FCCB debts. But, the unpredictability of the markets has brought those plans to a point where Wockhardt may consider selling some of its units, according to news reports.
What may come handy for the Indian drug companies though is an RBI directive that allows Indian companies to raise ECBs to buyback their FCCBs. But that may not wriggle out companies entirely as there are some stringent riders. RBI has allowed companies to buy back only up to $50 million of the redemption value and to exercise the option, companies will have time till March 2009. That's a major limiting factor as most of the conversions are due in the next 12 months.
Reflecting the serious situation, a brokerage report suggests, "We do not think the liberalised scheme for prepayment/buyback of FCCBs would benefit Indian pharma majorly. One needs to raise fresh ECBs to buy back outstanding FCCBs under the auto route. Looking at the global financial turmoil, it will be tough for Indian players to raise fresh debt at favourable terms. Also, the deteriorated financials owing to wild currency fluctuations in the recent past disqualifies players from raise fund at favourable terms required for FCCB pre-redemption.''
One company that stands out from the crowd is Sun Pharma. With an extremely guarded strategy, it looks as if Sun Pharma had almost seen the FCCB problem approaching and the conversions were done well in time by that company. Sun's was one of the biggest FCCBs, as it raised around $275 million through the instrument for acquisitions. Management vision could be a distinguishing factor between Sun Pharma and the rest of the pack.
Pillman is an executive closely linked to the global pharma industry.
