Pharmstandard Said to Weigh Sale of OTC Drugs Business

OAO Pharmstandard, Russia’s biggest drugmaker, is considering the sale of an over-the-counter medicines business, people familiar with the matter said.

The assets may be valued at about $2.5 billion, according to the people, who asked not to be identified as the talks are private. Citigroup Inc. is helping organize the sale process, which is still at an early stage, the people said.

The unit would offer a gateway to Russia, where the government has limited the reach of foreign drugmakers. Pharmstandard said it captured a 3.4 percent share of the country’s $24.9 billion pharmaceutical market last year, putting it behind Swiss drugmaker Novartis AG and French pharmaceutical company Sanofi.

“It may be a good entrance ticket to the Russian market,” Natalia Smirnova, a Moscow-based analyst at Deutsche Bank AG, said by phone. She recommends buying Pharmstandard shares.

Pharmstandard, based in Moscow, may draw interest from international companies seeking local production to avoid import duties in Russia, Smirnova said. The $2.5 billion price tag may be too high as the entire London-listed company was valued at about $3.1 billion, she said. Also unclear, she said, is just how the over-the-counter business would be carved out.

Shares Rise

Pharmstandard’s global depositary receipts fell 1.7 percent to close at $20.15 in London. Pharmstandard is also listed on the Micex exchange in Moscow.

Irina Bakhturina, head of investor relations at Pharmstandard, said she isn’t aware of any sale being considered and declined to comment further. A spokeswoman for Citigroup declined to comment yesterday.

Over-the-counter drug sales fell 4.5 percent to 14.8 billion rubles ($451 million) last year, accounting for 29 percent of Pharmstandard’s revenue. Sales growth came instead from the prescription-drug unit, with revenue rising 33 percent. Pharmstandard’s revenue from third-party over-the-counter products also rose 30 percent to 28.3 billion rubles.

Once Pharmstandard’s core business, contributing three-quarters of revenue in 2007, the over-the-counter unit has been under pressure as its brands have aged and government regulation has increased, Ivan Kushch, an analyst at Moscow-based VTB Capital, wrote in a note today.

Increased Competition

Kushch cited three factors putting pressure the over-the-counter business. Competition from private labels is growing, formerly over-the-counter drugs have been shifted to prescription-only, and the government is debating an advertising ban on non-prescription drugs, he wrote. Kushch has a buy rating on Pharmstandard’s shares.

Anti-flu medicine Arbidol, painkiller Pentalgin and Complivit vitamins are among Pharmstandard’s top sellers, the company said.

Fifty-four percent of Pharmstandard’s Moscow-listed shares are owned by Augment Investments Ltd., according to the drugmaker’s website. Augment belongs to Pharmstandard Chairman Viktor Kharitonin and board member Yegor Kulkov. Kharitonin owns 38 percent of Pharmstandard, according to Forbes’s billionaires list this year.

In 2003, Kharitonin bought Russian plants of ICN Pharmaceuticals with billionaire Roman Abramovich to create Pharmstandard. The company’s GDRs started trading in London in 2007. Abramovich and his partner Evgeny Shvidler sold a 17 percent stake in the company to Kharitonin and Kulkov the following year.

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