BIG Pharma and costly medicines

Zerohedge carried an article on medicines in Greek and the role of BIG Pharma - reported here. The first paragraph is reproduced below:
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Greece is facing a serious shortage of medicines amid claims that pharmaceutical multinationals have halted shipments to the country because of the economic crisis and, as The Guardian reports, concerns that the drugs will be exported by middlemen because prices are higher in other European countries. Rubbing further salt into the Greek (un-medicated) wound, the Red Cross slashed its supply of donor blood to Greece because it had not paid its bills on time. Pharmacies in Greece describe chaotic scenes as clients desperately search from shop to shop for much-needed drugs. Greece's Pharmaceutical Association said "around 300 drugs are in very short supply," adding that "It's a disgrace. The companies are ensuring that they come in dribs and drabs to avoid prosecution. Everyone is really frightened." The fear for the multinationals remains that wholesalers can legally sell to other nations at higher prices and a "combination of Greece's low medicine prices and unpaid debt by the state." Lines form early and 'get very aggressive' one pharmacy exclaimed, "We have reached a tragic point."
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Recently, the "Intellectual Property Appellate Board (IPAB)" in India upheld the grant of compulsory license of a Bayer drug to Natco. Some more licenses are in the pipeline. However, what comes as a surprise is the attempt by the government to set up another committee for pricing drugs - which may effectively put a stop to this licensing. Is this a case of success of foreign lobbying. Already, price of drugs in India have risen steeply. It would indeed be unfortunate if another scam were brewing in as essential commodity as medicine.

CAG Reports and the Markets

My column for Wealth Insight on the CAG reports is here. The article is reproduced below

CAG deserves the kudos of all right- thinking Indians for raising the level of public debate

The Comptroller and Auditor General of India (CAG) is not a position most people in India have been familiar with. This changed recently when CAG reports repeatedly made headlines claiming massive loot of the public exchequer. In August, a multitude of reports hit the Parliament — all pointing out lacunae in government policy and putative losses. The government’s spin masters went to work quickly. While some attempted to show that the CAG reports overstepped their mandate, others challenged the content of reports — in particular, the attempt to quantify losses arising to the public from flawed implementation of policy. Yet others have attempted to question the motives of the CAG.

Irrespective of the outcome, Vinod Rai — the incumbent CAG – deserves the kudos of all right- thinking Indians for raising the level of public debate. Every once in a while, a leader comes along who uses the full power of a constitutional authority. The Election Commission underwent such a change under TN Seshan. I hope this continues even after Rai demits office.

Analysis is succinct yet comprehensive
CAG has released a number of reports. For want of space, I discuss only the report on Ultra Mega Power Projects (UMPP) here. The report — something I recommend all to read for its lucid and incisive analysis is available at http://saiindia.gov.in/english/home/Recent/Recent.html. If only analysts wrote as clearly and authoritatively!

The report makes several points with regard to the allocation of UMPP licences and related coal reserves:
# The government did not follow its own rules — starting with appointment of the bid consultant
# Terms of the bid were altered to suit certain bidders (in particular Reliance power or RPL, the eventual winner), by diluting requirements of ownership, investment, and experience
# Extra land was allotted despite a study to show that it was in excess. No effort was made to recover the land despite it being established that it was in excess
# Allotment of coal blocks were made — in excess of the requirement — despite having no justification or study to show the need
# The excess coal was allowed to be diverted to another project — tariff for which was already determined based on the need to buy coal. This clearly amounted to violation of bid conditions in favour of Reliance Power
# The report quotes from RPL’s own estimates which put the extra gain to the company from the allotted coal to the tune of Rs 29,000 crore It is worth recalling that Tata Power has a case pending in the Supreme Court challenging the use of coal allotted for Sasan for Chitrangi Project (as approved by the Empowered Group of Ministers, or EGOM).

The defence
RPL’s defence is simple. They are not responsible for the excess coal, that the allocation of the extra mine has been ratified by the EGOM twice — once in 2008, and again in 2012. There are also somewhat gratuitous comments suggesting that CAG’s recommendation of reviewing the allocation of coal would result in India continuing to remain short of coal.

The argument is self-serving. Of course the allotment of mines has to be a government decision! The mines belong to the public and are being allotted. To suggest that this happens without intervention of the beneficiary is to stretch credulity to the point of breaking. To assert that without the mines being allotted to RPL, India would remain short of coal is laughable. First, the mines have not yet started delivering anything. Also, there are other perfectly capable companies that can mine the coal, and would pay for it.

The government’s defence is even more pathetic. To the primary allegation of extra allotment, the ministry of power has responded that the Attorney General of India has opined that the decision of the EGOM in 2008 was “well considered” — and hence the recommendation of the CAG that the extra allotment be withdrawn, may be ignored. It begs the question on why the EGOM allotted the extra mine in the first place, and why it felt imperative to overrule the conditions of allotment. Sample this: ‘The coal produced from these mines would be exclusively used in the Sasan UMPP.’

The other points are even more wishy-washy — and have been torn down in the report of the CAG itself with arguments that seem perfectly reasonable.

Greater transparency: churn in the index
The reports will now be referred to the Public Accounts Committee, where the matter is unlikely to result in corrective action. Given that this cannot be blamed on allies (unlike the 3G imbroglio), it would result in serious embarrassment for an already embattled government.

However, it may and hopefully will, result in a new and clearer policy of allotment of natural resources, in particular coal. Short-term, this may result in even slower decision making. Our shortage of coal is likely to continue. Longer term, the challenge of allotment of scare resources — airwaves, coal and iron ore, and even concessions to operate airports and roads — is likely to become more streamlined. Clear policies will remove the politicians’ ability to “seek rent” — a polite term for extracting money from public goods. With that, infrastructure companies will be less attractive to secondary investors — as unpredictable upsides are unlikely to occur. This may result in another shake up in the index. Currently 40 per cent of the index capitalisation is from companies dependent on energy, coal, and steel — all industries benefiting from ability to influence government policy. A reduction of this number over the next decade will represent the coming of age of the Indian economy.

FDI in retail - liberalization or suicide

Apparently, the government is again contemplating FDI in retail sector. Since the Left parties are opposed to it, it has become fashionable for the "young" and "progressive" to pooh pooh the concerns and recommend this as a measure of India's "opening up". Surprisingly, the proponents of liberalization (assuming such are in a majority) do not themselves seem to have confidence in the businesses they recommend - witness the abysmal (single digit) ownership of equity of Indian companies among the Indian public. The pity is, that most such free-market proponents are unknowingly acting as lobbyists - for free. The foreigners know better - atleast they demand a price to lobby! Remember Enron?

So what is at stake here? A Wal-mart is almost the size of Indian retail industry, yet employs only 5% of the people retailing in India supports. In a country where job creation significantly lags additions to the labour force, any sensible government (other than one bought out by lobbyists) will have to wonder as to the pay-off of this "liberal" policy.

Even assuming that we accept that law of the jungle should work and only the strong should survive - what exactly is the argument for "foreign" ownership? Do Indian entrepreneurs not have the skill or risk taking capability to set up and run retail businesses - there is after all no bar on them doing so. So why this shrill demand for opening up to foreign investors?

The few companies that have ventured into retail have yet to generate economic return on capital. Stripped of accounting shenanigans, no company in the business has generated a return that meets its cost of capital. On the other hand, many "innovations" of "organized retail" - extending credit, home delivery etc. are already offered by the friendly neighbourhood retailer. Clearly, the only way that "organized retail" will complete is by adopting competition destroying methods of discounting and taking upfront losses - leveraging their ability to raise "free capital" from the stock market. Consumers will suffer int the longer term as cartels forces prices up once the small retailer is driven out of business. Is this what "free markets" are supposed to foster?

Weak leader, weak response

This morning started with another report of an attack on an Indian in Australia. This time, four youngsters attacked a taxi driver from India while travelling in his cab. The Australian response would have been hilarious if it were not so tragic.

The Australians have claimed once again that this was not a "racial" attack - simply "opportunistic". I wonder what that means. I guess the Indian taxi driver gave the white Australian an "opportunity" to attack him since he took them in as passengers, and they were only using that opportunity to beat him and spit at him. Presumably, that is what all civilised passengers in Australian cabs are expected to do if given the "opportunity"! Poor chaps, we should not blame them. Does this remind you of the response to a recent rape case in Goa, where a venerable member of the assembly had accused the victim of "allowing" herself to be victimised?

The next question to ask is - how do the police know that these attacks are NOT racially motivated? Since they claim to have not yet solved any case - or made any arrests, where is this certainty coming from?

I came across a website with an interview with, seemingly, some Indian official. Both, the tone of the questions (suggesting Indian media were blowing up the cases without adequate information), and the Indian officials obsequiousness (suggesting that Australia was a better place than India) almost made me throw up. The only blog comment on the site is telling - the writer commends the Indian government advisory to students - since that would restrict Indian from taking away jobs!
 
The US, meanwhile, has issued a demarche to China - asking for an explanation wrt the hacking attempt on Google! Just goes to tell you how important it is for US to protect commercial interests. For the current Manmohan Singh government, on the other hand, a few Indian lives is not worth protesting over - Will someone please tell  Shashi Tharoor that tweeting on visa issues is not the only job of a junior minister of foreign affairs. Writing out a demarche to Australia may be more workmanlike. But then who ever said that we had a government that wants to work.

What is common between Koda and the maoists

Two recent developments - seemingly unrelated - have been hogging the headlines.

The former Chief Minister of Jharkhand is being investigated for amassing wealth beyond known means. Apparently, this money was earned through handing out mining rights. The interesting question to ask is - since mining has not started in most places, how was the money made - clearly, through the "sale" of the mining rights. Who paid? Surely those that benefited most - those who received these rights! Is it not strange that none of these companies are being investigated? Now you know why Indian Steel companies claim to be among the lowest-cost producers of steel in the world.

Almost simultaneously, the Central Government has started an aggressive campaign against the maoists. Maoist activity is undoubtedly a big problem in India - and has been for several decades. So why the thrust NOW? Has it anything to do with the fact that corporate India's new mines are in maoist infested areas? There was need to make these areas safe for mining. Hence the appointment of the redoubtable Mr. Chidambaram (formerly a director on the Board of Sterlite - one of the largest resources companies in India) as Home Minister, and the drive against Maoists under his leadership.

India's problem now wears corporate hues.

Aspartame

We have been working on a report about a company that markets a variant of Aspartame. In the process, I came across a series of articles on how Aspartame was approved by the US FDA. Here is one such. Don Rumsfield seems to have more than the blood of Afghans and Iraqis on his hand. Also, a gentle reminder that when it comes to corruption, Indians are not an exception, we follow the rest !

Read more here.  Corporates have their own agenda - look at the support the horrible Nuclear policy has generated in India - and often the agenda is inimical to the interest of the country.

A similar case is what is happening with Madhu Koda... read the next post.

What’s with this “political uncertainty”?

Most market commentators. when asked about the possible direction of the market in the near term, hide behind the excuse that “political uncertainty” leading up to the general elections will lead to subdued market performance. Almost as if it was not the job of the market to deal with uncertainty and make decisions in the absence of perfect information.

In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?



A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.





In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following

“Experience since the late 1980s has shown that coalition governments are formed and held together by the judicious spreading around of loans, grants and subsidies, which obviously limits the resources available to be spent on other projects. .. For example from 1999-2002 Andhra Pradesh got $763 million in “additional central assistance for externally aided projects in state plans” because of the influence of its governing Telegu Desam Party, the single most important coalition partner in the national NDA coalition government in new Delhi. The opposition controlled state of Bihar got only a tenth as much, despite a greater population and much worst absolute levels of poverty. However when a Congress-coalition replaced the NDA in 2004, it was Bihar’s turn to benefit from electing large numbers of MPs to a key coalition party, the RJD”

What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:

“This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price.”

Now that is a different existential question we need to confront!

Power Corrupts...

Maytas's Teja Raju is experiencing a "Deewar" moment - P C Gupta, Minister of Corporate Affairs, has decided that Satyam's Raju's son must suffer because "mera baap chor hai". The Government has decided to dismiss the board and take over the management of Maytas Infra. The reason offered :

"On the basis of information available, the government finds a strong possibility of the affairs of these two companies having been conducted by its current management with fraudulent intent, breach of trust to the stakeholders, and persistent neglect of the obligations and functions."

While it seems reasonable to assume that funds diverted from Satyam would have found its way to Maytas, the question that arises is - in what way is the current board performing its duties to the detriment of its shareholders. If it is, the government needs to explain how. If it is not, it appears that there is an arbitrary exercise of power by the government.

In fact, if the allegation that Maytas received funds owed to the shareholders of Satyam is taken to court, it is probable that the current Board will represent the interest of shareholders of Maytas better than a Government appointed board - that will take its instructions from Mr Gupta. This is the point I was seeking to make in my interview on CNBC on Friday.

The other allegation, made by EAS Sarma in the same interview, - that there was political patronage that helped Maytas in building its business - raised the hackles of Mr. Gulabchand. More so since I pointed out that there cannot be any company involved in the real-estate and infrastructure space that would not have been the beneficiary of political goodwill.

Most systemic clean-ups happen when there is a scam. The financial markets were cleaned up with the setting up of SEBI and the NSE - when the BSE had become dysfunctional and was working for brokers more than investors. One can only hope that the current scam leads to a clean up - not only in the bankruptcy laws of the country - but more importantly, in the clean up of the real estate markets and the appointment of a regulator for the sector. A well functioning real estate market has the potential to unleash huge economic potential while simultaneously bringing a large part of the unaccounted economy above gound.

Insider Trading or margin calls?

The Satyam episode offers an interesting case which could help define insider trading more sharply. To recap, the Maytas merger announcement led to a sharp drop in Satyam share price. Ostensibly, this triggered part sales of shares which were pledged by the Raju's and against which money had been raised. The events are chronicled here. Interestingly, Merrill Lynch, which was appointed as an investment banker too had extended loans to the Raju's and had shares pledged against this loan. These shares too, were sold at a time when the company was an investment banker, and consequently privy to the inside story. 

The moot point, as raised by my partner is an earlier venture, is - do these "margin calls" qualify as insider trades. After all, the effect of these trades, was to extinguish, atleast in part, liabilities of the Raju's, when their own subsequent actions ensured that the value would completely erode in a few days. Is this, therefore, a fit case for "disgorgement" of unfair profits made by the promoters. Particularly in the light of the precarious fiscal situation that Satyam finds itself in, should the shareholders - in particular those seeking to prosecute the class action suits - not make IL&FS and Merrill a party, and seek to extract the excess value they received as a result of sales made of promoter shares just a few days before the confession?

More legally oriented minds need to comment.

Why does Reliance need money?

Recent news reports of Reliance Industries (RIL) seeking to raise money are puzzling. Especially the quantum - in excess of Rs15,000 crs ($3bn). The report points out that Crisil, the rating agency that rates these bonds, has justified a AAA rating because it claims that RIL has Rs22,600crs of net cash accrual. - 44% of the net debt of RIL, and an interest cover of 22.

The petrochem cycle is currently down, as are the refining margins that RIL must be making. However, to require such a massive raising of capital indicates a financial requirement far in excess of what the known capex of the company indicates.

Other reports are telling : The Central Government has withdrawn its affidavit in the case of RIL-RNRL, which will now allow a settlement to proceed between the two companies. The Oil ministry is contemplating a move to float the market price of petrol and diesel - a laudable objective in general, but completely counter-trend in pre-election behaviour. Incidentally, both these moves will be beneficial to RIL - which is reflected in the recent share price upmove.

So what explains the capital raising? Given the sharp fall in crude price over the past couple of months, inventory losses may be a possible explanation. However, normal operations will not result in losses to require the scale of capital raising. Possible scenarios are (a) the scale of inventory losses are huge - suggesting speculative trading (b) the cost of development of the KG basin has suddenly gone up - which is either great news (more gas has been found), or terrible news (the project cost has inexplicably gone up), (c) the retail plans of RIL have been put on the fast track

Take your pick.

Public - Private partnership - what happened to private risk taking?

The US Senate refused to bail out the US car manufacturers. Closer home, as if on cue, the demand for government guarantees for infrastructure projects seems to be rising. On a show on a business channel last evening, I was asked to comment on whether the government should provide such support, in the context of the increasing difficulty in reaching financial closure for long gestation, and low return infrastructure projects. A similar demand was voiced by the Chairman of one of India's largest construction companies a few days ago on a rival channel.

Lets look at the merit of case - long gestation infrastructure projects are currently difficult to finance because lenders - predominantly bankers - see them as risky. The risk for road projects for example - arises either out of estimation of "tollable" traffic, or the duration of loan - typically in excess of 20 years. Government guarantees will doubtless make these projects bankable. The question then is "what is the role of the private sector?"

To me, it appears that once again, the private sector wants to pass on legitimate commercial risk to the public while keeping the profits involved in the construction of the project in private hands! The moot point is, why should the public sector not do it all itself? Which brings us back to a government controlled "planned" economy - a model which was supposedly given up for dead just a few months back.

The logical work-around would be to look at measure to develop a vibrant and functioning debt market, which India sorely lacks. Simultaneously, we need to develop a long term bond market to allow intermediaries to match tenure risk. There are several studies which point to the steps that need to be taken in this regard - which I will discuss in another post. What we definitely do not need is another form of crony capitalism!