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Knoll Pharma open offer: Pros and cons

May 7, 2001

Abbott Laboratories Inc has made an open offer to the shareholders of Knoll Pharma to acquire 20% of the company’s equity at Rs 328 per share. This follows Knoll Pharma’s parent company’s sell-out to Abbott Inc. Is it worth for Knoll Pharma shareholders to consider this option? Let’s take a look at a few things to evaluate this offer.

  • Knoll Pharma is a leading player in the domestic insulin, anti-diabetic, (with a market leadership in insulin therapy) pain control, and antacid market. Leading brands from the company’s stable include Brufen (anti- rheumatic), Diegen (anti-acid), Epilex (anti–epilepsy) and Cremmafin (laxative).

  • It has a high DPCO exposure of more than 62%. Imminent changes in industry led by dilution in DPCO would be a big upside for Knoll considering that 62 per cent of its turnover comes from price-controlled products. Moreover, company has received 22 per cent hike in insulin formulation which accounts for 41 per cent of turnover in 2000 – Rs 1.4 bn) in April 2001. This is expected to improve performance in FY 2001. Knoll Pharma : Better days ahead

  • Abbott Inc also has a 51% subsidiary viz, Abbott Laboratories India, which has major presence in vitamins, anti-infective, hospital and diagnostic products. Of the multinational pharma companies operating in India, Abbott is one of the few companies with a portfolio extending to hospital products and pediatric nutrition. The product portfolio of the company seems to be complimentary with Knoll Pharma.

  • At the current market price Knoll Pharma is trading at just 10 times its expected earnings for FY02.

Shareholding Pattern of Knoll Pharma % of Holding
Indian Promoters and Foreign Collaborators 56.7
Institutions and Mutual Funds 14.3
FII’s/GDR 3.3
Free Float 25.7

At the current market price of Rs 304, the open offer price (Rs 328) is at a 8% premium. Abbott will find it difficult to entice a 20% shareholding from the offer considering there is only 26% equity in free float. It seems unlikely that institutions would offer their stake for only an 8% premium considering that the long-term prospects of the company look good.

There is a case for investors to continue holding their stock i.e. not opt for the open offer. This is mainly due to the business upside mentioned above. However, in view of the difference between the offer price and the market price, shareholders of Knoll Pharma can gain from arbitrage.

Exercising the option gives the shareholder an immediate 8% upside. Existing shareholders could buy more stock in the market and submit their existing stock in the tender offer (i.e. arbitrage). The risk however is that their shares may not be accepted in the tender offer, under which circumstance they would be left holding more stock of Knoll Pharma. But if their shares are accepted, investors stand to make an immediate gain. However, an 8% premium to the market price doesn’t seem to be lucrative for Knoll Pharma shareholders.

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