Ranbaxy & Daiichi Deal : Minority Shareholders Interests Compromised

Just read Ajit Dayal’s column titled Ranbaxy-Daiichi deal: a case of perverse engineering? in today’s edition of DNA Money

Hey Ajit,couldn’t agree with you more !…but it’s not the first time in India’s Corporate History that Minority Shareholders are being treated like if I may say, Step Shareholders!

There is an even better and horrid precedent…. Years back Sulzer’s foreign parent bought out the co promoter, Goenka’s stake at Rs 2000 a share ! while market prize was only Rs 250 !….as it was a transfer between promoters,SEBI’s SASTA regulations did not require a mandatory offer to existing minority shareholders to buy out atleast 20% of the equity.

Methinks that with all the controversy and uncertainty surrounding Ranbaxy with the US case on sub standard drugs and the agreement with Pfizer to delay marketing “Lipitor”, SEBI should pass a directive that the Open Offer should be for full remaining stake held by Shareholders at Rs 737 (Price being paid by Daiichi to Ranbaxy Promoters for their full stake) and not just a 20% offer which would result in only one of three shareholder shares being accepted at Rs 737…..Ranbaxy would then possibly face delisting as shareholders would rationally tender all shares  which would then have to be accepted and floating stock would stop floating !

This would be fair considering the suspicion that not everyhing is above board

Growing suspicion is that the Promoters of Ranbaxy,CEO and Managing Director,Mr Malvinder Singh and Family,despite recent claims of moving towards becoming India’s Global Pharmaceutical Multinational,did a U-turn and preferred to exit and sold out their full stake to Daiichi at Rs 737 because they were fully aware of the disastrous consequences if the decision in the US case went against Ranbaxy

Today’s Business Standard carries a front page interview with Mr Singh in which he accuses,without naming them,two pharmaceutical companies,one Indian and the other a Multinational,and a coterie of brokers for the rapid fall in the stock price,

Ranbaxy crashed by 10% on Monday and a further 15% on Tuesday to a low of Rs 405 before reviving on Wednesday to close at Rs 470….It closed today at Rs 452

The Financial Express today carries a quote from Mr Mark Pohl,a US based registered patent attorney in which Mr Pohl states that the company is effectively out of business in USA if the FDA finds that the company has submitted falsified,misleading and incomplete documents and debars it.This would mean the company cannot get approval for fresh Abbreviated New Drug Applications (ANDAs) and cannot even maintain existing ones.

Ranbaxy’s 140 pages 2007 Annual Report ( download from www.ranbaxy.com) reveals that 26% of the Global Revenues comes from USA and Canada .It certainly will be a disaster if these markets were affected.As of December 31,2007 there were 239 ANDAs with 114 approvals.Also USA held potential for 18 First to File (FTF) opportunities with a market of US $ 27 billion.Ranbaxy has already filed two FTF applications

In 2007 ,Ranbaxy has achieved Consolidated Global Sales of US $ 1.6 billion and a Profit after Tax of US $ 190 million. In Rupee Terms the Profit was Rs 787 crs …Other Income comprised of a wholesome Rs 443 crs (Just Rs 68 crs in 2006) …most of it was exchange gains on Fx Borrowings(Rs 307 crs) and some sale of assets (Rs 68 crs)….and would you believe it ! Rs 187 Crores were spend on Legal & Professional Fees (Rs 173 crores in 2006) !….the Equity is Rs 187 crs (FV Rs 5) so you could say  Rs 5 per share is being spend for Legal Fees !…that’s a sacrifice of an EPS of Rs 5 too !…that’ s a sacrifice of Rs 100+ in Share Price based on a 20 multiple !…also if you you remove the Other Income Element,as most would be non recurring,profits are more than halved !…so you’ll see the share price slide below Rs 300 post open offer as EPS levels would probably be in the range of Rs 10 to Rs 15

Amusingly,a brokerage house,First Global has just released a positive and literally colourful report on Ranbaxy…would you believe there is no mention of the US Case at all let alone specifying the risks it entails!

Despite having a strong Board of Directors that include the likes of Mr Nimesh Kampani and Mr Gurcharan Das we need to question the Quality of Disclosure and Corporate Governance.Neither the Chairman’s Report ,nor those of the CEO and Managing Director or the Chief Operating Officer even mention any  legal threats,potential or existing. 

Has Mr Singh downplayed the risks attached to the US case for Sub standard Drugs? He says it not something new but I’m sure he does know how this matter is developing.The Annual Report was signed on March 28,2008….just three and a half months ago…but there is no mention of the Daiichi deal negotiations.The report highlights the Vision of Sales of US $ 5 billion by 2012 and Ranbaxy to be in the top Five Global Generic Companies in the world. 

The Annual Report also reveals that no provision for any fines or penalties have been made in regard to cases filed by Govts of UK and Scotland and the FDA Investigation in USA ….it seems billions of dollars would have to be paid out in fines and penalties if the decision in USA goes against Ranbaxy

Company has no Whistle Blowers Policy ….. so who will blow the Whistle ! ?

I also think the Auditors,Walker and Chandlok and Grant Thornton (US GAAP) could have perhaps qualified their report as the risk is very real and significantly material too.Their reports are clean and unqualified

The Annual Report discloses risks of legal Issues as below  

  • In the Management Discussion and Analysis Report on Page 41 under Outlook on Threats ,Risks and Concerns

The manufacture of generic pharmaceuticals is heavily regulated by governmental authorities around the world, including by US FDA. Any material non-compliance could potentially have adverse affect on manufacturing operations at the concerned facility, on approvals of drug products in the market and for grant of approvals of new products.

In regard to some of our manufacturing facilities, the US FDA has made certain observations most of which have been responded to while a few are in the process of being addressed. Specifically in regard to the facility at Poanta Sahib (Himachal Pradesh, India), we have fulfilled our commitments made to the US FDA and await their final clearance pending which, we could continue to face delays for new product approvals from this plant. We continue to cooperate fully with the concerned authorities.

  • Under Cautionary Statement on Page 42

Important factor’s that could make a difference to the Company’s operations,include Government regulations,patent laws,tax regimes,economic developments within India and countries in which the Company conducts business,litigation and other allied factors

  • Under Notes to Consolidated Accounts (US GAAP) on Page 135
 

 
NOTE W – SERIOUS FRAUD OFFICE CASE

 

In April, 2006, SFO, UK instituted criminal proceeding against several defendants including Ranbaxy (UK) Limited (“RUKL”) for conspiracy to defraud the Secretary of State for Health and others by fixing and maintaining price etc. of medicinal products during April 1, 1998 to September 30, 2000.

In March, 2008, an Appellate Court in UK held that price fixing by itself could not be termed as conspiracy to defraud.

No date has been set for the trial to commence. If found guilty, RUKL could be subjected to fine. The Management does not deem it necessary to make any provision in this regard.

NOTE X – SCOTTISH & NORTHERN IRELAND PROCEEDINGS – CIVIL CLAIMS

In 2005, the Scottish and Northern Irish Health Authorities (“the Authorities”) initiated proceedings by filing civil claims against a number of pharmaceutical companies, including RUKL on the alleged grounds relating to anti-competitive conduct. RUKL filed defence to both the proceedings in 2006.

The Authorities during the year 2007 proposed for a settlement offer of £1.5 million in order to settle the cases. RUKL is defending the cases and does not deem it necessary to make any provision in this regard.

NOTE Y – FOOD AND DRUG ADMINISTRATION (“FDA”) INVESTIGATION

Federal Officials, led by the FDA, conducted a search on February 14, 2007, at the US subsidiary’s New Jersey premises, and subpoenas for various categories of documents were issued. The Group is co-operating with the officials in connection with the investigation. This includes production of documents in response to queries. The investigation continues and the outcome and related impact remains uncertain and cannot be determined. Therefore, no amounts related to potential losses or potential impacts of an unfavourable outcome of the investigation have been recorded in the financial statements.

 

 

 

 Good Luck to those who hold shares of Ranbaxy

     

 

 

 

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