The proposed move helps Apollo to become compliant with the the prescribed foreign direct investment (FDI) limits and further grow the pharmacy retail business.
Apollo Hospitals, India's largest private healthcare provider on November 14 said it plans to spin off its front-end retail pharmacy business into a separate entity called Apollo Pharmacies (APL), which in turn will be a wholly-owned subsidiary of Apollo Medicals (AMPL).
The board of directors of the company at its meeting held Wednesday decided "to segregate the front-end retail pharmacy business carried out in the standalone pharmacy segment into a separate company Apollo Pharmacies Ltd (APL)," Apollo Hospitals said in a statement.
Apollo will hold 25.5 percent stake in AMPL, while the balance will be held by investors such as Jhelum Investment Fund 1 (19.9 percent), Hemendra Kothari (9.9 percent) and ENAM Securities (44.7 percent).
Apollo Hospitals will reserve the right to acquire the shares of AMPL from the investors, in addition to becoming the exclusive supplier for APL under a long-term supplier agreement. Apollo will enter brand licensing agreement with APL to licence the "Apollo Pharmacy" brand to the frontend stores and online pharmacy operations.
"The proposed reorganisation would not have a material impact on the financials of Apollo as the backend business related to the standalone pharmacies which represent 85 percent of the business economics will continue to be held by Apollo," the company said in a statement to stock exchanges.
Expansion of the pharmacy business
The proposed move helps Apollo become compliant with the prescribed foreign direct investment (FDI) limits and further grow the pharmacy retail business.
Retail pharmacy business come under the category of multi-brand retail, where FDI is allowed to 51 percent. Foreign investors hold up to 55 percent in Apollo.
The scheme of arrangement has to be approved by stock exchanges, shareholders, National Company Law Tribunal and all other required regulatory authorities. Apollo expects the new structure to be effective from April 2019.
Apollo said the proposed spin-off will allow the company to maximise shareholder value and set the platform for "Value Discovery" of the retail pharmacy business.
"The Board recognized that the company's standalone pharmacy business has been growing at a rapid pace and that the business has matured and is today at an inflection point requiring greater focus and attention, independent of the hospital business, given the growth opportunity that India's domestic pharma market has over the medium term," Apollo added.
The pharmacy business constituted about 38 percent of Apollo's Rs 8,243.5 crore revenues in FY18. The pharmacy division sales grew 17 percent on YoY basis with an EBITDA margin of 4.5 percent, which was less than half the company's EBITDA of 9.6 percent.
As on September 30, Apollo Pharmacy had 3,167 outlets in 400 cities and towns spread over 20 states and 4 Union territories and is currently serving about 300,000 customers daily with employee strength of about 21,000.
Apollo has set a medium-term target of over 5,000 pharmacies over 5 years with a goal of over Rs 10,000 crores in revenues and 30 percent combined return on capital employed (RoCE) in the next 5 years.
Organised pharmacy retail accounts for less than 5 percent of India's $15 bn domestic pharmaceutical market which is estimated to grow 10-12 percent CAGR over the next decade, driven predominantly by volume growth.
Consolidated net profit in the second quarter ended September rose 27 percent Rs 61.9 crore led by the better operational performance of its flagship hospital business.
The company posted a net profit of Rs 48.8 crore in the same period of previous year.
Total revenues rose 14.9 percent YoY to Rs 2400.6 crore in the second quarter. The consolidated EBITDA stood at 11.3 percent, while hospital business EBITDA was at 18.2 percent.
New Hospitals revenues grew by 23 percent from Rs 3,68 crore in H1FY18 to Rs 451.9 in H1FY19. Revenues from Tamil Nadu, Apollo's largest market grew 10 percent to Rs 979.8 crore in H1FY19.
Apollo has 69 hospitals with total bed capacity of 9,834 beds as on September 30, 2018, of which 43 are owned hospitals including JVs and subsidiaries and associates with 8,353 beds.
Of the 8,353 owned hospital beds capacity, 7,181 beds were operational and had an occupancy of 67% in H1FY19Shares of Apollo rose 1.82 percent to close at Rs 1166.15 on BSE, while the benchmark Sensex dropped 0.01 percent to end 35,141.99 points.