A Client had placed a Deposit of Rs 50000 with Morepen Labs years ago…Under a Scheme of Arrangement and Compromise,It got converted into 3313 Shares…he asked me whether he should Hold or Sell….The Price is currently Rs 9 thereabouts…so he should recover nearly Rs 30000
An emotional decision would dictate to Sell…and after reviewing the current financials and potential of Morepen Labs and the repeated realisation of the deliberate and continuous Flawed thinking of the Suris,who have promoted and run the company,I would even say a rational decision would be to Sell
The Company had bet big time on ‘Loratadine’ and had hoped to capitalise in the US Market after this drug went off patent…In 1999 It had secured the USFDA approval for ‘Loratadine’ and had dedicated a seperate Manufacturing Plant for supplying to the US market…it had even entered into an Exclusive Selling Rights agreement for six months once the drug went off patent with Geneva Pharma (part of Novartis)
It blames the delay to sell in the US Market to Schering Plough,the patent holder,extending the patent by six more months…this,Morepen claims,delayed the launch of Loratadine in USA ….affecting cash inflows and building up inventory costs…it led to working capital being diverted to pay off interest and short term loans
Once Loratadine went off patent,the price of ‘Claritin’ the brand for Loratadine in the US collapsed….From US $ 8000/kg to US $ 1000/kg and then towards US 600/kg…..This was a knockout blow to Morepen….24 tpa was initially planned to abe produced and then raised to 36 tpa….A US $ 200 Million market crashed to under US $ 20 Million !
This phenomenon of Prices of Patented Drugs crashing significantly once off patent was not uncommon….Morepen must have realised this….but what they did not plan for is that the Price will fall over 90% !
So ‘Loratadine’ collapsed and thus so did Morepen.
After years of deliberation,A CDR was structured for Morepen and 22 Banks took a One Time Settlement,while six others opted for payments over ten Years…Non CDR banks were negotiated on a one to one basis….Unsecured Creditors like the Fixed Deposit Holders were left out of the CDR Settlements….the cashflows are not enough for this
And so a Scheme of Arrangement or Compromise was born….Here’s where I see some flawed thinking by the Suris….They arrived at a Scheme to convert the Debt of Deposits to Equity….nothing wrong in this,as it gives an exit route to Depositholders….but the flawed thinking was that SEBI Guidelines for issuing Shares were used!…this simply meant that Shares were issued at the highest price as per the guidelines….this meant a lower number of shares for the Deposit Holders!…this in turn meant less realisations to them…this is a deliberate ploy