The Chinese unit manufactures 6APA, a derivative of Penicillin-G, predominately for use by Aurobindo. However, performance of the unit has been affected by economies of scale and is incurring losses.
Consequently, Aurobindo has decided to sell the unit to Sinopharm but retain a 19.5 per cent stake to ensure uninterrupted supply of competitively priced raw materials. Sinopharm will, subject to regulatory approvals, acquire 51 per cent before increasing its stake to 80.5 per cent.
Selling the unit allows Aurobindo to focus on its finished drug business while sourcing ingredients from third-parties. In the past two years Aurobindo has inked finished product supply deals with AstraZeneca and Pfizer to strengthen its presence in the high-margin formulation sector.
Over the past six years Aurobindo has tried to move away from low-margin ingredients and into the finished products sector. In light of this, the board of directors decided divestment of the Chinese unit is in the best interests of Aurobindo.
Sale of the unit
By significantly enhancing capacity and downstream products Sinopharm will improve economies of scale and reduce the cost of production, according to Aurobindo. These steps are designed to return the unit to profitability after it began incurring losses under Aurobindo’s ownership.
Aurobindo expects to realise $48-50m (€37-39m) from the transaction, a company spokesperson told the Wall Street Journal, including Sinopharm repaying a $23m loan Aurobindo made to the unit.
Shares of Aurobindo closed up 0.3 per cent at 1,292.85 rupees on the Bombay Stock Exchange. Earlier in the day shares had risen by 2.1 per cent but fell back before close.