Who's Writing The Script For Morepen's Scrip?

INVESTIGATION
Who's Writing The Script For Morepen's Scrip?

Although CEO K.B. Suri justifies the bull run, the catalyst for it might be hype-not anti-histamines.

By Ranju Sarkar

K.B. Suri, CEO, Morepen There's more to Morepen Laboratories than meets the eye-and it sure isn't Loratadine. At least, not when it comes to its stock prices. Sure, if you had invested Rs 1,000 on January, 1, 1999, in this little-known pharma company, you would have laughed all the way to your bank on July 30, 1999, with Rs 4,780-and it isn't even a Net scrip on Wall Street! Who would have ever thought that this Rs 257-crore, family-managed, Delhi-based pharma minor would, suddenly, sizzle so?

Certainly not the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Or, axiomatically, the Securities & Exchange Board of India (sebi). Three days after May 14, 1999, when Morepen hit an all-time high of Rs 610, the SEBI asked the BSE and the NSE to initiate independent investigations into the scrip's movements that would examine the possibility that its prices were actually being rigged. Confirms L.K. Singhvi, 53, Senior Executive Director (Legal), SEBI: ''We have asked both the stock-exchanges to look into the scrip.'' That put a temporary brake on the scrip-price, which crashed to Rs 500 on July 9, 1999, before rising again to Rs 593 on July 30, 1999.

Although the BSE, which refused to divulge more details, submitted its report to the SEBI on July 26, 1999, opinions about Morepen are sharply-divided. Justifies Navin Bora, 27, an analyst with DBS Securities: ''Morepen's scrip-prices could have shot up because of the approval by America's Federal Drugs Administration (FDA) of its facilities to manufacture Loratadine, a superior anti-histamine.'' Especially since the fifth-largest selling bulk drug in the world will, 2 years from now, go off-patent, providing Morepen an opportunity to become a global supplier by end-2001.

Counters Vijay Mehta, 45, CEO, Mefcom Capital Markets: ''Morepen's price-rise was fuelled by short deliveries, and, I suspect, something is definitely being done by its management. Or someone.'' An analysis of the scrip's movements on the BSE in the last 12 months seems to bolster that argument. Between July 9, 1998, and February 27, 1999, only 3.75 lakh Morepen shares changed hands even as the price hovered between Rs 143.00 and Rs 153.30 per share. Of this, over 1.50 lakh shares were traded on one single day, November 12, 1998, which means that the trading on other days was limited to a few thousand shares.

Strangely, in the next 4 months, even as the price zoomed from Rs 160.80 on March 1, 1999, to Rs 492.15 on June 30, 1999, more than 30 lakh shares were traded-10 times the normal volumes. ''That's why,'' explains a BSE spokesperson, ''we asked for client details to see if the same people have bought shares from different brokers.'' Distancing the company's promoter-managers from the charges of insider trading, Sushil Suri, 35, Director (Finance & Corporate Affairs), Morepen, and the younger brother of the 37-year-old founder-CEO, K.B. Suri, asserts: ''We received the FDA's letter on March 18, 1999, and issued a press-release on April 7, 1999. But the stockmarkets knew by then since the FDA had disclosed the news before we got the letter.''

Mystifying, since the price-movements reflect a different story. If Suri's explanation is correct, the Morepen scrip should have peaked in the first half of March, 1999. But between January 1, 1999, and March 17, 1999, the scrip rose only marginally from Rs 134.00 to Rs 139.00, after attaining a high of Rs 186.00 on March 4, 1999. Even if stockbrokers did know about the fda approval, the price-movements implied that they had already discounted the good news.

However, in the 20 days between the approval being received and the company issuing a press-release, the scrip zoomed up by 72 per cent to close at Rs 239.70. In fact, that was the time when information leaked about the FDA approval. Then, the climb simply wouldn't stop: by April 22, the scrip was closing at Rs 405 and, on May 14, it had peaked at Rs 610. It was only on May 22, 1999, that Morepen reported a 60 per cent rise in net profits for 1998-99, and also claimed that Loratadine's global sales would rise from $1.80 billion in 1998 to $3 billion in 2002. Of course, by then, the twin investigations had been ordered by the SEBI.

Obviously, the manner in which Morepen's stock has gone up by 379 per cent in the last 6 months is raising eyebrows. By comparison, Ranbaxy Laboratories and Aurobindo Pharma scrips went up by 163 and 183 per cent, respectively, in the same period. Charges V.D. Agarwal, 58, CEO, Abhibra Capital: ''It appears that the promoters may have purchased their own shares.'' Adds S. Mittal, 31, Vice-President, Inmacs, a NSA stockbroker: ''Such a rise in the price of the Morepen scrip appears to be unwarranted.''

Especially since the market dynamics of an off-patent drug are rather more complex than investors seem to think. Sure, Loratadine enjoys a 51 per cent share of the anti-histamines segment, but whenever a drug goes off-patent, 2 factors come into play. First, competition intensifies as all the bulk drugs-manufacturers in the world vie for a slice of the cake. And, second, the price of the drug crashes. In fact, research suggests that, once their patents expire, prices of even blockbuster drugs fall by 80-90 per cent.

Given the intense competition in off-patent drugs, Morepen's estimates that it will grab a 16 per cent share of the market-which is expected to treble to 300 tonnes per annum (tpa) by 2002-may prove to be optimistic. Explains Rajinder Nakra, 47, CEO, Raj Nakra Associates, a Delhi-based pharma consultancy: ''Only if it has marketing alliances with the generics firms will that target prove to be not too difficult to achieve.''

As for profitability, according to the company, its selling-costs are $500 per kg of Loratadine. Even if prices crash by as much as 95 per cent-from $18,000 per kg to $900 per kg-the Suris expect to earn a margin of $400 per kg. Or, annual profits of Rs 21.50 crore. That's only if Morepen sells a conservative 10 tonnes a year versus its (planned) volumes of 48 tpa. Of course, the company's margins will also get squeezed. The logic is simple: as raw-material prices rise, the price of the product falls due to competition. Eventually, the era of super profits does not last for more than a year.

Clearly, there's many a molecule of doubt in the rise and rise of the Morepen scrip. Although Loratadine has the potential to earn additional profits for the company, given the global market-forces that come into play in the case of off-patent bulk drugs, it may be nowhere as huge as the investor expects. So, the unusual rise in the scrip-price over the past 6 months could have allowed some stockbrokers-not necessarily those backed by the Morepen management-to make a killing on the Street. Evidently, there's more hype than (anti-)histamine to Morepen.

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