| The first EMR in the Indian pharma sector has been shrouded in controversy.
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| The grant of EMR to Novartis for its anti-cancer drug, Glivec, has been challenged by Natco Pharma. Natco, which has a generic version of Glivec in the Indian market, has challenged the EMR on the grounds that it does not meet the product patent norms, under which EMRs can be granted only for molecules filed after 01 January, 1995.
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| Therefore, if the filing has been done prior to 1995, the product will not be applicable for patent protection post-2005 and Natco can continue marketing its product. The catch here is that there is lack of clarity on when Novartis filed for a patent on the molecule of Glivec with the US Food and Drugs Administration (FDA).
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| Under the WTO norms, India has agreed that products that enjoy patents under FDA rules will also enjoy patent protection in countries that have agreed to the WTO norms.
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| According to analysts, filing with the domestic authorities does not hold much value except for the EMR. According to Novartis, the company filed for EMR with the Indian authorities in November 2002.
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| Analysts say that the average time to market for a molecule is around 8-10 years. But Novartis received the approvals from the FDA within three years. Hence, the EMR acts as a stop-gap measure until the patent laws come into force.
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| Natco launched its generic product recently in January 2003. If the EMR to Novartis is a valid one, it will result in a loss of revenue and margins for Natco for a couple of reasons. First, with the product launched only recently, it will take more than a year for the product to payback the investments in developing the product and brand building.
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| With slightly less than two years to go before patents laws come into force in April 2005 (under the WTO), it will be a wasted investment for Natco or else the company expects to earn very high margins.
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| Secondly, the segment is a niche low volume and high margin segment. Natco’s balance sheet states that since its launch, it notched up sales of Rs 1 crore per month since May-June 2003, which is significant. Thus, if the EMR is a valid one, it will mean a loss of revenues of around 8-10 per cent of revenues for the current fiscal.
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| It will also mean a larger loss of profitability in the following years when the investment starts paying back. The uncertainty surrounding the EMR made its impact felt on Natco’s stock price, which lost 5.73 per cent yesterday.
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| Pantaloon Retail
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| In less than two years’ time, the Pantaloon Retail stock has jumped around 1000 per cent, from around Rs 27 in end-2001 to Rs 270 now. The main beneficiaries of this huge move in the stock have been the company’s promoters, who have regularly been cashing in by selling shares in the open market.
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| Since April 2002, Pantaloon’s promoter group has sold over 30 lakh shares at an average price of around Rs 120. But what’s really interesting is the promoter holding has not changed much as a result of this offloading of shares.
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| This is because the promoter group has been simultaneously buying shares in the company through preferential issues. Since April 2002, the promoter group has (so far) acquired 49 lakh shares at an average price of just Rs 35.
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| In percentage terms, promoter holding was 38.8 per cent at the end of March 2002, and at the latest count, the promoter holding remains at around 38 per cent. The company has now approved another preferential issue, this time comprising both equity shares (at Rs 112 per share) and FCDs (fully convertible debentures). By the time the debentures are converted into shares (at Rs 112 per share), promoter holding would have gone up to over 46 per cent.
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| More importantly, while the sale transactions have been taking place at market rates, the buy transactions have been at considerably lower rates. For instance, there was a sale of 8.5 lakh shares earlier this month at the rate of around Rs 275 per share. But when the promoter group will acquire shares through the preferential issue route, they would be paying just Rs 112 per share.
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| This seems unfair, but the preference issue price is decided at least three months before the actual issue. According to Sebi regulations, the base date to be used for the calculation of the minimum price (which is the higher of the average price in the previous six months or the average price in the previous two weeks) is the date of the general shareholders meeting when the preferential issue is approved.
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| The company is then given a time of three months to make the preferential issue. Pantaloon’s promoters have simply benefited because of this three-month time lag, during which time the company’s share price has more than doubled.
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| With contributions by Sameer Ranade and Mobis Philipose |
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