R&D hive-offs fail to cheer

The recent move by pharmaceutical companies such as Ranbaxy Laboratories, Sun Pharma and Nicholas Piramal to hive off their research and development (R&D) divisions into separate companies, ostensibly to insulate shareholders from the risks associated with research, has not received a positive response from the stock market.

Sun Pharma was the first company to hive off its new drug research and development unit into a full-fledged separate company. In 20 days from February 10, when the demerger and formation of Sun Pharma Advanced Company was announced, its share price fell to Rs 927.55 from Rs 1030.15.

The share price subsequently slipped further to Rs 905, but then recovered to its current level of Rs 1042, a marginal gain of 1.15 per cent since the announcement.

Against this, the Sensex gained 32.68 per cent, while the Bombay Stock Exchange's Healthcare index was relatively flat at 3866.54, an increase of 1.17 per cent since February 10, 2007.

Ranbaxy announced the demerger of its R&D unit on October 18, and since then its share price has increased just 1.27 per cent to Rs 427.20 from Rs 421.85.

However, the share price of Nicholas Piramal has grown steadily by 12.59 per cent to Rs 304 from Rs 270, since its announcement at the end of August.

"Actually, the share prices of companies such as Ranbaxy and Sun Pharma had gone up prior to the announcements, in anticipation, following unconfirmed news reports appearing in the media. However, the share prices did not rise after the announcement," said Sarabjit Kaur Nangra, senior sector analyst at Angel Broking.

"The sudden change in share movements during the announcement was actually effected by short-term investors," said an analyst.

Analysts said that the move to demerge the R&D units is a part of the long-term vision of the management, to maintain cash flow for their high-risk, long-term drug development plans.

Routing large funds from the low-risk, low-return generic business to invest in drug development cannot go well with long-term investors. Therefore, managements will have to treat both businesses separately after a certain level of growth.

News reports that Chennai-based Shasun Chemicals and Drugs' plans to hive off its research and development division and undertake corporate restructuring has also not gone down well with investors.

Share prices of Shasun have fallen sharply by 25.88 per cent to Rs 67 from Rs 90.40 in the past month.

Similarly, Orchid Chemical's share price has fallen by 14 per cent to Rs 215 from Rs 250 in the past three months, after Orchid floated a separate subsidiary, Orchid Research Laboratories, to nurture its drugs pipeline.