Is it a transfer in good faith?

Legendary investor Chandrakant Sampat writes an open letter to the board of directors of Wyeth India Ltd.

Wyeth USA announced its plan to transfer the marketing rights of the vaccine Prevenar at a cost of Rs 22.60 crore which sparked off a major controversy among the Wyeth's Indian shareholders last week. It has also put the spotlight on the issue of corporate governance practised by the company.

With the introduction of the product-patent regime in India last year, investors have been betting that MNC-affiliates will step up introduction of new products in India which can boost their revenues in the coming years.

However, the move to set up a new Indian subsidiary and deprive the existing arm of a good product raised concerns among investors. The scrip plummeted 14.73 per cent on the date of announcement. The scrip has still not recovered as it is down by 24.44 per cent than its pre-announcement price.

The issue is a throwback to the 1990s when MNCs were accused of favouring their 100 per cent subsidiaries over listed domestic companies in which they don't have full control. This is an open letter to the company's board of directors written by thinker and legendary investor Chandrakant Sampat. It is not meant to confrontational.

With all humility, I wish to elaborate certain facts, though the board is well aware of these facts. Perhaps while taking this decision, it appears that these facts were not considered.

In the annual report of Wyeth India Limited for the accounting year ended 31 March 2005, it was mentioned that the introduction of product patents from 2005 presents an opportunity for the launch of patented products from the pipeline of Wyeth, USA.

India's large population and increasing health awareness should open the avenues for growth of the pharmaceutical industry. The company sees a good future based on its current portfolio and new products launch program. The Company plans to introduce new products in both Pharma and OTC segments.

In the annual report for the accounting year ended 31st March 2004, it was stated that one of the biggest opportunities for the company is ready access to the pipeline of new products of Wyeth, USA.

In the chairman's statement in Annual General Meeting for the year 2002-03, it was said that a vaccine for invasive Pneumococcal disease would be launched in near future.

In February 2005, when a Vice President of Wyeth had visited India, he had talked about launching a number of global blockbuster products in the market through Wyeth Ltd besides commenting that "we are looking to deliver good financial returns to our shareholders"

In September 2005, Wyeth's medical director had commented that "Wyeth in India is working on making its international blockbuster vaccine for pneumococal disease (PD) available here soon. The company is in the process of getting regulatory clearance from DCGI and expects to launch pediatric vaccine in India very shortly." Note that at that time there was no 100 per cent subsidiary of Wyeth in India.

Wyeth Ltd.'s annual report states that its mission is to "deliver outstanding value to our customers and shareholders". Its vision is to "make trust, integrity and excellence hallmarks". Its values is to "do what is right for our customers, communities shareholders".

I wish to point out that above statements made by the management implies grant to Wyeth Ltd. This implies that the marketing of Wyeth's products will be through Indian listed subsidiary.

Since it is a grant, it can not be valued by an independent valuer; it is the free markets which decides the discovery price. In this instance taking back the grant has resulted in valueing the grant @ Rs 400/- crores (loss of market value). In other words: does this action fit the mission statement? Is this transfer in good faith?

For example, Glaxo Smithkline Pharma, UK has been introducing all the products in India through its quoted subsidiary in India. And also stated clearly that all the products would be marketed by Indian quoted subsidiary. If this grant is withdrawn the market may value the grant @ amazing Rs 3000 crores (loss of market value).

Further, this transfer entails a great danger and repercussion on the capital markets. As an analogy, let me say this: Hypothetically if Colgate, USA pays Rs 500 crore for the marketing rights of its products to Colgate India and the rights are transferred to Colgate, USA's 100 per cent subsidiary in India, will it not mean that Colgate, USA purchases Colgate India with a market capitalization of Rs 5,000 crore for just Rs 500 crore?

This proposed transaction will encourage and bring about plethora of such transactions which will have very severe social repercussion. May I therefore, request you to kindly reconsider the process that has been announced? After all, investment is a matter of trust and once it is broken, it cannot be restored.

To end, I may point out that since market capitalizes the future earnings, this particular action has caused great wealth loss to the public.

Let me quote Richard Sennett from his book "The Corrosion of Character": "But I do know a regime which provides human beings no deep reason to care about one another cannot long preserve its legitimacy."

RESEARCH CALLS

Godrej Consumer Products
Angel Broking recommends a "buy" on Godrej Consumer Products. The report states that the company is a leader in hair colour in the personal care segment with a 40 per cent market share and has the second largest marketshare of 9.5 per cent in the toilet soaps segment.

The company's toilet soaps segment has been growing at a higher rate than industry since FY02. It has immense growth potential with both the segments poised to grow at a faster clip going ahead. Moreover, towards expanding its global presence, the company recently acquired the UK-based Keyline Brands.

GSK Consumer Healthcare
Gupta Equities, in its report on GSK Consumer Healthcare, states that Indian health food drink market is estimated at Rs 1400 crore in value and 65,000 tpa in volume terms.

The FMCG industry is poised to achieve an overall growth between 8-8.5 per cent in 2005-06, up 2-2.5 per cent over the growth rate clocked in the previous year.

As a market leader with a 70 per cent share of the health-drinks category, this company is likely to get a boost by this trend. The company, on its part, has also renewed brand-building efforts, which were flagged off in 2003-04.