Pharmstandard Value Sinks $1.4 Billion on Deal Skepticism

OAO Pharmstandard tumbled for a third day as Russia’s biggest pharmaceutical company presses on with the $630 million purchase of a company affiliated to one of its board members.

The drugmaker has lost 45 percent of its market value, or about $1.4 billion, following a July 8 shakeup when Pharmstandard said it was buying Singapore-based Bever Pharmaceutical Pte Ltd., without disclosing why, and announced the spinoff of its own branded, non-prescription drugs business. Pharmstandard dropped 21 percent to 1,472.40 rubles by the close in Moscow, the most since October 2008. Global depositary receipts fell 20 percent to $11.15, the most since April 2009.

“The company failed to answer why it’s planning to pay such a significant sum for an unknown company,” Natalia Smirnova, an analyst at Deutsche Bank AG, said by phone from Moscow. “It’s an unknown company without a sales history.”

Bever gained the rights this year to sell active pharmaceutical ingredients for Pharmstandard’s anti-flu medicine Arbidol and tranquilizer Aphobazolum, Pharmstandard’s Chief Executive Officer Igor Krylov said on a conference call yesterday. Bever, which didn’t have any sales last year, is affiliated with a Pharmstandard board member, Krylov said. He didn’t disclose which. Pharmstandard had been considering selling its OTC unit, people with knowledge of the matter said last month.

‘Increased Profitability’

“The potential acquisition of Bever would result in reduced cost of goods sold and, accordingly, in increased profitability of the Arbidol and Aphobazolum brands,” Pharmstandard said today in a statement.

Pharmstandard hasn’t signed an agreement with Bever and is discussing the transaction terms, which may include shares of the company held by its unit OJSC Pharmstandard-Leksredstva, according to today’s statement. Payment may be deferred until the end of the year, the company said.

The Leksredstva unit holds about 11 percent of Pharmstandard, according to the company’s website. Fifty-four percent of Pharmstandard’s 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. Of the remaining shares, 25 percent are GDRs and 9.7 percent are traded in Moscow.

‘Challenging Management’

“The company is not operating to the benefit of all the shareholders,” VTB Capital analysts led by Ivan Kushch said in an e-mailed note, citing the “tone” of yesterday’s conference call and reiterating their sell recommendation.

Pharmstandard said in a separate statement today that it has purchased 5.3 billion rubles of stock, or about 8.3 million GDRs and 140,000 ordinary shares, as part of a buyback announced in February which may reach as much as 8 billion rubles.

“Analysts and investors were challenging management to get any information on what Bever is, who its beneficiaries are, where the synergies emerge and what the reason for the spinoff is,” Kushch said. “However, management was reluctant to discuss these issues and gave basic answers.”

Bever may have been created by Alexander Shuster, a Pharmstandard board member, according to an e-mailed note by Sberbank CIB analysts led by Mikhail Krasnoperov. Shuster has been a member of Pharmstandard’s board since June 2011 and is the scientific director of Masterclone CJS, according to the drugmaker’s website. A spokeswoman for Shuster declined to comment when contacted by Bloomberg News by phone.

‘Opaque Manner’

“There is further downside if the producer continues to act in such an opaque manner,” Sberbank CIB analysts said in an e-mailed note, cutting the stock to sell.

Buying Bever and folding it into the spinoff will make the OTC unit more profitable, Krylov said, predicting it may then become “attractive” to global buyers. The spun-off company will be publicly listed, he said. Pharmstandard plans a shareholder meeting on Aug. 17 to vote on the purchase, according to a July 8 regulatory filing.

“Pharmstandard’s investment case is now plagued with uncertainty, corporate governance concerns and considerable credibility damage, which we think negate the potential benefits of the reorganization,” Otkritie Capital analyst Mikhail Terentiev, said in an e-mailed note. “The Bever deal appears value-destructive.”

Seeing Risk

Bank of America Merrill Lynch said in a note today it “struggles to find a compelling argument” for the spinoff of the over-the-counter business and sees risk in a “single management team handling different drug portfolios.” It cut the stock to underperform, the equivalent of sell.

Pharmstandard’s Moscow-listed stock has lost 34 percent since it announced the spinoff. The company also said it will offer to buy out shareholders who don’t vote for the reorganization for 2,180 rubles a share, equivalent to about $16.50 a GDR. That was a discount of 2.3 percent to the July 8 closing price in Moscow and 18 percent in London.

According to Russian law, the buyout volume may not exceed 10 percent of Pharmstandard’s assets value, IR-head Irina Bakhturina said yesterday on the conference call.

Pharmstandard’s own capital was 37.6 billion rubles at year-end, meaning the company may spend up to 3.76 billion rubles on the buyout, according to Evgeny Golosnoy, an analyst at IFC Metropol.


“It’s peanuts,” he said. “This means that if all the minority shareholders tender their shares for buyout, only 1/10 of the orders will be fulfilled.”

Bever is owned by Andrey Osipov, according to company records filed with Singapore’s Accounting and Corporate Regulatory Authority. Osipov worked at billionaire Roman Abramovich’s Millhouse LLC during the period Pharmstandard was being formed, and left in 2005. Osipov is a board member of Aresbank, in which Kulkov and Kharitonin each hold 18 percent.

While Osipov said he controls Bever, he said he has no affiliation with Pharmstandard. He declined to comment on whether Shuster is the beneficiary of Bever, citing a confidentiality agreement.

“I didn’t have and don’t have any relationship with Pharmstandard,” Osipov said by phone today.