Apollo Hospitals denies allegations related to pharmacy business de-merger

On Tuesday, the stock price of AHEL came down by Rs 97.80 to end the day at Rs 1,430.85 per share

Apollo Hospitals
Apollo Hospitals

The stock price of Apollo Hospitals Enterprise Ltd (AHEL) saw a 6.40 per cent decline on Tuesday following reports alleging a de-merger of pharmacy business by the company might hurt its minority shareholders. The company refuted the allegations and said value accretion from growth of the standalone pharmacy business, the front end of which was now undergoing a de-merger process, would "create significant value for AHEL shareholders."

It added that an eventual merger of Keimed — the pharmaceutical distribution company from which Apollo Pharmacy has been purchasing medicines and in which the promoters of Apollo Hospital Group held a stake — with the de-merged entity, Apollo Pharmacies Ltd, was never envisaged. Purchasing from the distribution firm had helped it achieve 2-3 per cent incremental margins as it was passed on from them to AHEL.

The company was responding to social media reports that the deal, announced last November, looks more like a parking exercise than a clean de-merger and it would hurt the pharmacy vision and minority shareholders. It has also made references to Apollo Pharmacy buying majority of its stocks from Keimed, which is connected to the promoters.

On Tuesday, the stock price of AHEL came down Rs 97.80 by the end of the day to Rs 1,430.85 per share.

"We fully and categorically reject the misconceptions and incorrect conclusions about the intent behind the pharmacy de-merger, circulating on social media," said the company. The structure is to create a platform to execute an omni-channel strategy for its pharmacy business, and is a first step in a multi-year journey of unlocking value for the shareholders. The restructuring allows the Standalone Pharmacies to be housed in a regulatory compliant structure and a full de-merger or any other structure different from this would not have enabled the company to achieve the regulatory compliance.

"Our strategic intent is clear – we are focused on growing to 5,000 stores, achieving Rs 10,000 crore in revenues, and increasing sales from private label products, improving EBITDA & ROI, while simultaneously building our digital play," it said. Keimed’s distribution business was established to ensure a high quality, dependable supply chain of drugs and consumables for hospitals in India.

The group has sold some of the shares of Keimed to Japanese firm Mitsui & Co. In partnership with Mitsui, Keimed has been pursuing its stated strategy of expanding its supply-chain network and distribution capabilities. Keimed’s dependence on Apollo Hospitals for its business is less than 50 per cent. Keimed transactions have been subject to related party review and testing by PwC, who have reaffirmed the arms’ length nature of the transactions, it said.
In November 2018, the company decided to segregate the front-end retail pharmacy business carried out in the standalone pharmacy segment into a separate company Apollo Pharmacies Ltd (APL), which will be a subsidiary of Apollo Medicals Pvt Ltd (AMPL). The proposal is undergoing regulatory process. The shareholding of AMPL will be held by Apollo Hospitals and certain identified investors including Jhelum Investment Fund I, Hemendra Kothari and ENAM Securities Pvt Let. These investors will hold around 74.5 per cent stake, while Apollo Hospitals will secure 25.5 per cent stake in AMPL. 

Under the demerger terms, AHEL will be the exclusive supplier for APL under a long-term supplier agreement and AHEM will enter into a Brand Licensing Agreement with APL to licence the 'Apollo Pharmacy' brand to the frontend stores and online pharmacy operations, to further augment and strengthen the brand. Reportedly, AHEL has decided to transfer the business of the front-end retail pharmacy business to APL by way of slump sale for a sale consideration of Rs 527 crore.