Indian drug companies have reduced their cumulative foreign currency convertible bond (FCCB) burden by over 60 per cent. This has helped the companies improve their financial health and look for further fund-raising for expansions.
Analysts said most of the reduction happened in the last one year, thanks to the relaxation of norms by the Reserve Bank of India (RBI) in 2008 to allow buyback of the issued bonds on or before the end of December 31, 2009. This was a measure to help Indian industry tide over the global financial meltdown in the last two years, which resulted in large fluctuations in global currencies and mark-to-market (MTM) losses. Most of the FCCBs of drug companies were due for maturity in the 2010-13 period.
According to HDFC Securities data, 14 companies reduced their FCCB burden by 48 per cent in 2008-09 from Rs 76,562 crore to Rs 43,077 crore.
Analysts said improvements in share prices and overall business of the Indian drug majors augur well in future, and may prompt many of these companies to go for further capital raising and expansions.
“There is an overall improvement in the stock scene and business performance of drug companies. In the case of some players like Aurobindo, the conversion price of their FCCBs are lower than current share prices, which shows how things have changed in the past few months,” said Sujay Shetty, associate director, PricewaterhouseCoopers (PwC).
A useful instrument...
Companies like Ranbaxy Laboratories, Wockhardt, Jubilant Organosys, Lupin and Sun Pharma — which were growing at an above-industry average growth rate of 12-15 per cent for the past five years — had gone overseas in the 2005-08 period to buy assets, mainly in the developed markets of the US and Europe.
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FCCBs were the best available financial instrument then, as funds were easily available at attractive terms with no requirement for immediate equity dilution. Since January 1, the government has directed that no buyback of FCCBs will be allowed and the existing FCCBs will have to be repaid or converted into shares as per the issue’s terms.
“The reduction in FCCBs despite the discount offered is good for companies as this will help them leverage more in future for expansion, as their debt will be converted into equity on conversion. This will help to increase the net worth of companies and improve the debt to equity ratio,” said Ranjit Kapadia, vice-president (institutional research), HDFC Securities.
...to improve financial health
Kapadia noted that while FCCBs were bought back at a discount, the move helped to dramatically improve the financial health of these companies.
Take, for example, Ranbaxy Laboratories, which raised over $440 million (over Rs 2,000 crore) in 2006 to fund a string of acquisitions in 2006 and 2007 and posted losses in the past few years due to MTM losses and regulatory issues that affected its US business. It was the first Indian company in the country to reset the conversion price of FCCBs two years ago, offering a flat discount of 39 per cent.
Ranbaxy had received a sum of Rs 3,585 crore from allotment of equity shares and warrants to its new owner, Daiichi Sankyo, in October 2008, following sale of the drug major by promoters Malvinder Singh and family. Ranbaxy used Rs 3,460 crore of this money to repay debts.
Now the fortunes of the company are reversing and it is in a position to leverage more for its expansions and capital expansion for the exclusive drug sale opportunities in the US in the coming two-three years.
Sun Pharma, which is now sitting on a cash reserve of over Rs 3,500 crore, had paid for all its FCCBs two years ago. It had $222.2 million (Rs 1,013.6 crore) FCCB outstanding by the end of 2006-07, accumulated mainly due to a dozen-odd small acquisitions in the past.
Like Sun Pharma, Lupin is also free of the FCCB burden, as the $100 million (Rs 450 crore) it had raised earlier has been paid back. Lupin is one of the fastest growing generic companies in the world and is already number one among all generic companies that give the highest shareholder returns, according to BCG Consulting data.
“Margins in the brands business are relatively higher at 80-90 per cent, and this will help Lupin make a huge US business in future,” said Nilesh Gupta, group president and executive director, Lupin.
Contract manufacturing specialist Jubilant Organosys, which raised over $310 million (over Rs 1,400 crore) in the past and had the largest FCCB burden among all drug companies, has now reduced its FCCB burden to $193.60 million (Rs 883 crore).
“We have a strong cash flow and hope to maintain 25-27 per cent margin on a top line growth of 20 per cent in the coming years. We will also hive-off some non-core assets to bring down the debt burden and through streamlining expenses,” R Sankaraiah, chief financial officer of Jubilant, had earlier told Business Standard.
Aurobindo, which will soon start big drug supplies to the largest global drug company Pfizer through a contract awarded recently, has also reduced its FCCB outstanding from $260 million (Rs 1,186 crore) to $173.45 million (Rs 792 crore).
| BUYING BACK BONDS | |||
| Company | FCCBs issued | Extinguished | Outstanding |
| Ankur Drugs & Pharma | 16.00 | 8.00 | 8.00 |
| Aurobindo Pharma | 260.00 | 86.55 | 173.45 |
| Bilcare Limited | 50.00 | 11.82 | 38.18 |
| Dishman Pharma | 50.00 | 4.00 | 46.00 |
| Glenmark Pharma | 100.00 | 64.00 | 36.00 |
| Jubilant Organosys | 310.00 | 116.40 | 193.60 |
| Lupin Limited | 100.00 | 100.00 | 0.00 |
| Orchid Chemicals | 217.50 | 102.40 | 115.10 |
| Panacea Biotec | 50.00 | 13.20 | 36.80 |
| Ranbaxy Labs | 440.00 | 440.00 | 0.00 |
| Strides Arcolab | 140.00 | 24.50 | 115.50 |
| Sun Pharma | 350.00 | 350.00 | 0.00 |
| Venus Remedies | 12.00 | NA | 12.00 |
| Wockhardt Limited | 110.00 | NA | 110.00 |
| Total | 2205.50 | 1320.87 | 884.63 |
| (Source: Business Standard Research Bureau; FCCBs: Foreign currency convertible bonds; All figures in $ million) | |||
Orchid, which bought back FCCBs worth $60 million (Rs 274 crore), had an outstanding of $217.5 million (Rs 990 crore). At present, the burden is $115.10 million (Rs 525 crore). The company, which will sell off its injectable finished-dosage form pharmaceuticals business to US-based Hospira for $400 million (Rs 1,825 crore) in the first quarter of 2010, will use part of the proceeds to wipe off its debts.
Not all hunky-dory
But, all is not well for two companies,Wockhardt and Venus Remedies, on the FCCB front. Wockhardt, which opted for the corporate debt restructuring (CDR) route to restructure its debts, is now facing winding-up petitions in India, the US and the UK from US-based investor fund QVT Advisers, following a default in redemption of FCCB payments.
Already, one case is pending before the Bombay High Court. The company has an FCCB outstanding of $110 million (Rs 500 crore) and had offered two options for the FCCB holders as part of the CDR process.
Same is the case with Venus Remedies, which has an outstanding of $12 million (Rs 55 crore) FCCBs, as its FCCB investors filed a winding up petition against the company.