MOREPEN or MORE-PAIN !…..Morepen Labs (FV Rs 2) at Rs 9…Should you Hold or Sell ?….especially Deposit Stakeholders who have become Equity Stakeholders as they have been given shares in lieu of their Deposits

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

Here’s why

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

This was the Sequence of Dates

Board Meeting : June 15,2008…set 30/6/2008 as record date

Record Date : June 30,2008

As per the SEBI (Disclosure and Investor Protection) Guidelines 2000, and subsequent amendments,the SEBI Formula for pricing the Issue

13.1.1 Pricing of the Issue

13.1.1.1 The Issue of Shares on a Preferential basis can be made at a Price not less than the higher of the following :

i) the average of the weekly high and low of the closing prices of the related share quoted on a stock exchange during the six months preceding the relevant date

or

ii) the average of the weekly high and low of the closing prices of the related share quoted on a stock exchange during the two weeks preceding the relevant date

For the purpose of this clause the Relevant date is 30 days prior to the date on which meeting of the general body of shareholders is held in terms of Sec 81(1A) of the Companies Act 1956 to consider the Proposed Issue

You are converting Debt to Equity to provide some solace to Deposit Holders…but you don’t Price the Equity as per SEBI,don’t miss the Irony here,Investor Protection Guidelnes!…these Guidelines are not created to cover such situations of providing some comfort to the deposit Holders…they are to protect existing Investors and stakeholders so that any preferential issue is not made at a low price to give the allottees an ‘in the money’ situation on allotment itself

….but here the circumstances are different…the company is issuing shares in lieu of deposits…and that too after writing of 25% of the Outstanding Deposit,after adjusting for some payments made to the deposit holders!…in effect the Outstanding Amount will be even lesser than the Principal Deposit Amount and and the Settlement Amount will be 25% less on this Outstanding Amount…thus the Settlement Amount,in most cases, will be much less than 75% of the Principal Amount ! Tch! Tch!

And would you guess ! what is the Price that the shares have been issued at !…Rs 11.32,much higher than the Rs 7/8/9 it trades at when the shares came into the demat accounts earlier this year!

Clearly unfair to Deposit Holders…they have not only suffered a write off of 25% and much more on the Principal + a waiver of all Interest accrued and not paid + Time delays in years…but have to contend with a higher allotment Share Price of Rs 11.32,resulting in lesser number of shares allotted and resulting therefore in lesser realisation !

The Share Price History from January 2008 till date is also not very Inspiring…Quoted in the Rs 29-Rs 31 range beginning January 2008,Morepen sank to a range of Rs 10-Rs 12 by end June 2008 (record date)…and further to a range of Rs 5-Rs 6 by end 2008…Then it recovered mildly beginning 2009 to a range of Rs 6-Rs 8 and by end 2009 was trading between Rs 9-Rs 12…currently it has again slipped into a Rs 7-Rs 9 range

So Emotionally it clearly is a SELL signal of the Shares allotted to Deposit Holders as they realise that a Leopard,read the Promoters, cannot change it’s Spots !

Rationally too it is a SELL Signal…These are some relevant financial extracts

• For FY 09,Morepen lost Rs 35 crs
• It adjusted an accumulated loss of Rs 442 crs against Securities Premium Reserves
• FY 09 Networth was Rs 317 crs with a Total Debt of Rs 280 crs
• In FY 10,for the nine months at 31/12/2009,Morepen has a consolidated loss of Rs 11 crs,though on a standalone basis it has recorded a profit of Rs 5 crs on sales of Rs 141 crs
• The FY 09 Equity was Rs 71.46 crs (FV Rs 2)…at 31/12/2009 the Equity was Rs 89.96 crs with the Promoters holding 34.54% … There were 162150 shareholders…over 78000 of these would be deposit holders who have received shares in lieu of their deposits…cause at 30/6/2008 there were 81110 shareholders and after the allottment in the Q3 of FY 10,the number doubled past 160000 shareholders
• Total Capital Employed in FY 10 at 31/12/2009 was Rs 564 crs

To cross fundamentally into Two digit quotes of over Rs 10 and sustain there on the Stock Exchange,Morepen has to register an EPS of atleast Rs 1…that’s a PAT of Rs 45 crs…..with the sort of low margins it’s operating with  in all the segments…formulations,diagnostics and fast moving health goods….it needs Revenues of Rs 500 crs + to record an EPS of Rs 1…..unlikely in the short term

A better assessment of the potential and prospects going ahead can be made when it releases it’s FY 10 Annual Report in a few months….it’s margins,debt situation,segment results…all should reveal a better picture  

I’ve told my Client to action his immediate Emotions on Morepen and SELL his holding of 3313 Equity Shares….better cut off,rather than live in Hope….He had married Morepen with a Deposit….Now with the converted Equity,Morepen has given him an opportunity to Divorce…I’ve adviced him to take this Opportunity

MOREPEN could continue to be spelled MOREPAIN !