Does Novartis India have an ethics problem?

Failing to plan for a transparent subsidiary governance framework, is planning to fail.

In the middle of 2018, we wrote about Novartis India stock price being under valued at ₹ 666. We were convinced that Novartis India stock price (then traded only on BSE) was a wonderful opportunity for investors to buy a piece in India’s pharma market.

Today we are cautiously hanging on to our belief that the company with their fair reputation towards shareholders will do the right thing. Though Novartis India had been embroiled in numerous patent scandals and court cases in India, some recent developments have shaken shareholder confidence.

Well let’s get straight to the point! The publicly listed arm of Novartis India has been facing declining sales, profits and negative growth and there could be genuine reason for that.

Recently, Mr Dipankar M, a shareholder of Novartis India, during the 72nd (2020) Online Annual general meeting caught the attention of serious shareholders.

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Alluding to the long-term performance of Novartis India, he was candid in stating that since 2011 to 2020, the sales of Novartis India have declined from ₹749 crores to ₹438 crores with a negative CAGR of 3.45%. The profits during this period have been down from ₹147.67 crores in Mar 2011 to ₹10.08 crores in Mar 2020, that’s a negative CAGR of -21.67%. This continued decline of sales and profits, especially since FY15- 20 has been extremely steep.

In the universe of listed foreign companies in India; Pfizer, GlaxoSmithKline, Abbot, Sanofi India, AstraZeneca, most of them have recorded double digit % growth, profits & sales during the decade. Only two out of the five have recorded single digit % growth. The important fact is, India’s lucrative pharma market, majority of MNCs have recorded positive growth and increased shareholder value.

Novartis India is the only company with a negative CAGR, Sales & profits. The shareholders have been given the explanation by Novartis India and Novartis AG (the parent company) that the Indian Government’s week IPR regime and price control restrictions, are discouraging Novartis to make investments for growth in India. Also it’s the primary reason for Novartis India’s continuous decline.

Surprisingly, these constraints don’t seem to matter to other foreign MNC pharma companies in India and they have recorded year on year positive results. So, what’s the reason for Novartis India’s performance decline.

Dipankar argues the primary reason is that, Novartis has been unfairly operating through its unlisted subsidiary and denying its listed shareholder their fair dues.

• Novartis India has an unlisted subsidiary, Novartis Healthcare Pvt Ltd (NHPL)

• Post digging out the numbers of NHPL, the unlisted subsidiary had registered Sales in FY15 of ₹1700 crores. As of Mar 2019, the sales of NHPL ballooned to ₹3410Cr, that’s a positive CAGR of 19%.

• During this same time of FY15 to FY20 Novartis India’s sales figures declined year on year from ₹873 crores in FY 15 to ₹438 crores in FY 20, with a negative CAGR of 13%

• Another startling fact is that the unlisted NHPL profits in FY 15 were ₹79 crores. They increased in FY 2019 were ₹235 crores, a 300% jump in profits. While the listed Novartis India profits have declined from ₹79.11 crores in FY15 to ₹10.08 crores in FY20

The reasons are clear, Novartis India would rather focus on its unlisted subsidiary where it has 100% financial and ethical accountability to Novartis AG, the parent company.

It feels its much better to have Zero accountability to Novartis India shareholders. This also means Novartis India shareholders get short-changed on the true value of the listed stock in case there is a delisting at some point.

Dipankar further reiterates that there are other listed MNC pharma companies like Abbott India, Pfizer and Sanofi India, who have their unlisted subsidiaries in India, but their sales and profits are far lesser and some cases loss making.

NOVARTIS INDIA IS THE ONLY COMPANY WHERE THE LISTED ENTITY HAS LESS REVENUES, PROFITS AND RECORDING NEGATIVE GROWTH THAN THE UNLISTED OPAQUE SUBSIDARY. .

Dipankar voiced the CEO and Chairman to stop the charade along with the independent directors and questioned them, if;

1. they have a planned objective to transfer wealth from the minority shareholders of Novartis India to Novartis Healthcare (the unlisted subsidiary)?

2. we are reaching the end of the game, Dipankar said, and you need to tell us if the coming financial years, shareholders will see losses on books and further degrowth in Novartis India?

3. the management wishes to deny shareholder the merger between Novartis India & Novartis Healthcare.

4. and when will Novartis India come up with a buyback plan so that, minority shareholders can be kicked out giving them the least price for their stock

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We wish to greatly thank Dipankar for digging the financial details of Novartis Healthcare and putting it candidly across a public forum to the Novartis management. Surprisingly, none of the management or directors denied that Dipankar’s claims were untrue. He also asked the CEO (Sanjay Murdeshwar), Chairman (Christopher Snook) to explain the situation. Additionally, the Independent directors are responsible for corporate governance and keeping shareholders’ interests so that promoters don’t get their way, but its clearly not happening.

It was extremely surprising to see that none of Dipankar’s questions were answered and the independent directors did not provide any explanation.

If this is happening, its extremely unfortunate as the Novartis management owes a clear explanation to Novartis India shareholders. Firstly, it’s to be reiterated that NHPL is subsidiary of the Novartis India and the existing shareholders have the full right to the value of the unlisted entity. During buybacks or delisting, the valuation should be determined by disclosing the Sales, Profits and growth rates of both entities together.

The question is

• Will the market regulator SEBI investigate the matter as its important to protect the interests of all involved stakeholders. It is important that fair and adequate information be disclosed about Novartis Healthcare for the purpose of the current & future investment decisions

• SEBI to investigate further. Novartis India and Novartis healthcare, both entities are using the same office location (BKC Mumbai), resources and employee staff, hence as part of the consolidated earning & expenditure, all need to be transparently disclosed to the Novartis India shareholders.

• Will Novartis India disclose the financial details of the Novartis Healthcare to BSE & NSE

• Will the credit rating agencies give a fair view of the company’s credibility and its financial strength?

Its beyond our understanding, why the Novartis group, a $200 billion entity would conduct transactions that deprive minority Indian shareholders. Is it because the laws in India are easy to circumvent and investors gullible?

Additionally, it is a detriment to the Novartis brand & reputations since the India arm is too small, roughly 1% of the group’s size. Obviously, reputation is far valuable than 1%

Probably they might get away in India as the regulatory environment allows to take value from shareholders of Novartis India, but the bigger question is, if there's a systemic corporate culture illness at Novartis?