Sensex Opens Flat; Energy Stocks Lose

Mon, 25 Jun 09:30 am

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Asian share markets are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 0.4% while the Hang Seng is down 0.5%. The Shanghai Composite is trading up by 0.2%. Over the weekend, US stock indices closed mostly higher on gains in energy stocks.

Back home, India share markets opened the day on a flattish note. The BSE Sensex is trading down by 46 points while the NSE Nifty is trading down by 14 points. The BSE Mid Cap index and BSE Small Cap index both opened up by 0.2% & 0.1% respectively.

Sectoral indices have opened the day on a mixed note with energy stocks and automobile stocks witnessing maximum selling pressure. While, healthcare stocks & metal stocks opened the day in green. The rupee is trading at 67.77 to the US$.

In the news from the pharma space. As per an article in a leading financial daily, Dr Reddy's Laboratories Limited has lost a patent battle with Eli Lilly and Company over the litigation on Alimta (pemetrexed for injection) in the US. It is a drug meant for the treatment of several types of cancers.

Eli Lilly and Company announced that the US District Court for the Southern District of Indiana ruled in favour of Lilly that the Alimta vitamin regimen patent would be infringed by a competitor that had stated its intent to market alternative salt forms of pemetrexed prior to the patent's expiration in May 2022.

In a separate decision on 15 June, the District Court also ruled in favour of Lilly in the case of Eli Lilly and Company Vs Hospira.

Reportedly, these rulings mean Dr Reddy's Laboratories and Hospira will be prevented from launching their alternative salt forms of pemetrexed until the patent expires. Lilly said in its statement that it expects both Dr Reddy's Laboratories and Hospira to appeal.

In October 2017, the Patent Trial and Appeal Board of the US Patent and Trademark Office ruled in the company's favour regarding patentability of the vitamin regimen for Alimta.

According to the annual report 2017 of Eli Lilly, Alimta clocked US$ 2.1 billion worldwide including US$ 1.03 billion in USA.

Note that, innovators in the pharmaceutical industry make use of patents largely. They make heavy use of patents whenever they create a new drug. In one of the articles, we have spoken everything that you need to know about patented drugs, its advantages and its implications. Here's a snippet:

• "That's how the innovators in the pharmaceutical industry work. They make heavy use of patents whenever they create a new drug. The patent allows them to recoup the high capital expenditure that goes into the research and development (R&D) of new drugs. Companies that have a patent on a particular product are immune from competition for the duration of the patent."

Notably, a number of patent infringement cases have been filed against leading Indian pharma companies and their counterparts in other countries over the last few years.

Dr. Reddy's share price opened the day down by 1.7%.

Moving on to the news from the bank sector. As per an article in a leading financial daily, Housing Development Finance Corp and Kotak Mahindra Bank are competing for a controlling stake in PNB Housing Finance as they aim to gain wider coverage in a mortgage market that's seen among the safest of havens in the lending world.

Promoters Punjab National Bank and Carlyle, which together own about 66% of the company, are looking to sell their stake to a large investor.

Reportedly, the deal is expected to fetch them about Rs 60 billion each. The listed mortgage lender has a market capitalisation of Rs 179.4 billion.

Earlier this month, fraud-hit PNB had informed that a decision to disinvest in PNB Housing Finance, Icra, Crisil and BSE will be taken at the appropriate time depending on market conditions and available options to implement PSB's reforms agenda for responsive and responsible PSBs (public sector banks).

Note that, having listed in November 2016 after a Rs 30-billion initial public offer, PNB Housing Finance has seen its market value almost double since then. Carlyle invested Rs 16 billion in February 2015 for a 49% stake in the then unlisted company. It now owns a 33% stake, having recently sold about 5% in the open market.

Speaking of PSBs, they have had a difficult year, to put it mildly.

After the euphoria of recapitalisation, bad loans have come to haunt them. Post the Gitanjali Gems fiasco, PSBs are yet to fully recover from its impact.

This underperformance was despite the huge boost they got from the government last year. On 24 October 2017, the government announced a Rs 2.11 trillion public sector bank (PSB) capitalisation plan. This move was aimed at reviving the PSBs from the bad loan mess.

The next day was a field day for investors in PSBs. PSB stocks went up between 30% and 47%. Despite this, the return in the year was way below average. PSBs like PNB have crashed more than 45% over the last one year.

Have we reached the bottom? Or there are more Nirav Modi stories waiting to come out?

We, at Equitymaster believe, rather than bottom fishing, one should look at banks run by strong management and a differentiated lending strategy available at reasonable valuations.

HDFC share price opened the day down by 0.5% while Kotak Mahindra Bank share price opened flat.

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