Managing the art of Creativity
Pharma companies seem to be the masters at the art of creativity, and Matrix Laboratories is no exception here. Their expertise is not limited to merely creating new drug molecules, or retro booting ingenious generic variations of patented drugs, or even ANDAs, DMFs, or APIs. Increasingly, as they seek to grow and consolidate, their creative juices are being channeled into morphing a complex web of legal entities, which will confound even the artiest spider. The result is a bizarre maze, which range from subsidiaries, fellow subsidiaries, step down subsidiaries, or affiliates of the parent. Toss in the odd JV or two for some septic humor. If the objective is to obfuscate and confuse, then such strategies work most admirably. This subterfuge extends all the way to the top. Invariably the parent too is a step down subsidiary of a holding company, or some such.
Take the instant case of Matrix. Close to 97% of the company's paid up equity of Rs 312 m is held by M P Laboratories, the Mauritius based holding company. This holding company in turn, is a wholly owned subsidiary of the ultimate holding company, Mylan Laboratories Inc. Matrix itself is also an amalgam of 6 companies which merged into the parent at various points of time. The company incidentally was delisted for trading in India in 2009, as the public shareholding in the company has fallen below the minimum required for listing in the Indian bourses.
The giant web that makes it all possible
Matrix, on its own, has mastered the art of managing the environment. As a matter of fact one could say that it is hyper charged in this respect. Till just the other day, it made do with 27 subsidiaries or step subsidiaries, 9 fellow subsidiaries, 3 affiliates, and 2 joint ventures, making in all a grand total of 41 such cohabitants. These worthies were based out of such exotica as Singapore, the US, Netherlands, Belgium, China, Luxembourg, Switzerland, Italy, France, the UK, South Africa, and not excluding India. Not that they may collectively have anything much to show for it, but that is a secondary matter. From the incomplete details that are available, Belgium for some unknown reason is the most favored port of call, with 11 companies, followed by China with 6. Next in the pecking order is Netherlands with 4 and Switzerland with 2, and so on.
But by 2009-10 this categorization underwent a sea change. The number of subsidiaries got deflated to a mere ten thanks to mergers, divestments and some very fancy footwork. (Following in its wake, the number of affiliates got reduced to one, and of the 2 JVs, one, Fine Chemicals Corporation, was spun off, and the other, Astrix Laboratories, became its subsidiary through a convoluted route, of acquiring one additional share.) During 2009-10, one of the subsidiaries of Matrix India, namely its 100% owned Netherlands subsidiary, Matrix Laboratories BV, reduced its shareholding in its own Belgium based subsidiary, Matrix Laboratories BVBA, from 100% to just below 40%, thanks to a neat move initiated by the ultimate holding company, in tandem with a fellow subsidiary. The Belgium subsidiary, till recently, had 16 wholly owned subsidiaries of its own. When the holding of the Netherlands company in its Belgian subsidiary got nuked, the latter's own holding in each of its subsidiaries, withered to a little less than 40%, just as quickly. Besides, three of these little 'uns' got merged with another subsidiary, helping ease matters even further. This whole exercise was apparently put through, by one deft move. The ultimate holding company (read Mylan Laboratories) and a fellow subsidiary, decided to convert a 'portion' of the debt that it held in its Netherlands subsidiary into equity, setting off a domino effect down the line. How the domino effect could have been triggered off, as a result of the debt conversion in the Netherlands subsidiary is not very clear from the notes, but who is asking. The conversion ratio of the debt was apparently managed with quite some finesse, and it had its intended effect all right. The net result of this check mating is that all these erstwhile subsidiaries now go out of the public eye. They will henceforth be categorized as affiliates.
More of the same
The more incredible aspect of this jigsaw puzzle is that Matrix Labs currently has equity investments in only 3 subsidiaries - Matrix Labs BVBA, the Belgium subsidiary, in which it holds only one share of 1 Euro each and having a book value of Rs 52.39, in Matrix Laboratories BV, the Netherlands subsidiary, with a gross book value of Rs 5.5 bn, and in Astrix Laboratories with a book value of Rs 23 m. (Only the shareholding in Astrix has undergone any change in the two years). The total book value of its portfolio holding is Rs 5.8 bn gross. The status of the Belgian company is a puzzle. In reality it was a 100% subsidiary of Matrix Netherlands till the end of the preceding year. (Matrix Laboratories Netherlands in turn is a 100% subsidiary of Matrix Laboratories India). The holding of Matrix Netherlands, in the Belgium company, as stated earlier, got reduced to 39.9% during 2009-10. Unless I have missed something here, how can the Belgium company be a subsidiary of Matrix India in both years? O.K., in a sense even a holding of 1 share can bring about this qualification, but this is getting ridiculous. Because, if that were to be the case, then Matrix Belgium would have two joint holding companies, in 2008-09. And, if it is a subsidiary of Matrix India, then why have its results not been appended separately along with the results of the other subsidiaries?
A lousy joke
The company's holding in Matrix Netherlands is a lousy joke too. The gross book value of its investment in this subsidiary is Rs 5.5 bn. But after provisioning, as the subsidiary is apparently on the respirator, the net book value is only Rs 1.5 bn. And what does this badly injured subsidiary do for a living? From the brief details available it has a paid up capital of Rs 6.16 bn, negative reserves of Rs 4.7 bn, total assets of Rs 1.7 bn, NIL turnover, and a pretax loss of Rs 37 m. To start with this paid up capital differs vastly from the gross value of the holding in this company by Matrix India (the price paid by Matrix works out to Rs 55 per share, or a face value of 1 Euro each). What's more this company is supposed to be a 100% subsidiary of Matrix India. And, how does a company with assets of Rs 1.7 bn, including presumably, shareholdings in other companies, not have any income, but still record pre-tax losses? And, how did it come to accumulate such large negative reserves? Or have its subsidiaries become such basket cases that the parent has provided for these losses in its books through to write down of its investments? Questions of the kind that do not beget ready answers.
Solving some riddles
But fear not, for some of the riddles that bedevil the functioning of Matrix are being ironed out in a manner of speaking. The intended move will not wish away the problem on hand, but atleast will not directly affect the shareholders of Matrix any longer. The company is spinning off its troubled Netherlands subsidiary, and its two direct subsidiaries, (based out of Singapore and USA respectively), along with its indirect Belgian subsidiary (and the companies that the latter controls) to Mylan Luxembourg. The latter appears to be some sort of a tax haven. But these niceties are being resorted to only after the holding company had acquired a 97% stake in the voting stock of Matrix, which was followed by the delisting. The management, however, solemnly informs its shareholders that this transaction will be effected at a fair value.
How are the 10 subsidiaries including the step down subsidiaries doing per se? Collectively they have total assets of Rs 10.2 bn, a turnover of Rs 10.4 bn, and pre-tax profits of Rs 890 m. The collective paid up capital base is Rs 9.2 bn, and negative reserves of Rs 3.1 bn. Individually speaking - Astrix Laboratories is the top dog, with a turnover of Rs 4.6 bn, and a pre-tax profit of Rs 810 m. (Astrix Labs is presently and apparently a 50.02% subsidiary of Matrix India.) Of the 6 Chinese companies, three are in full flow and they rang up sales of Rs 4 bn but a pretax profit of only Rs 76 m. It also appears that it cannot even get the names of its subsidiaries right. The investment portfolio in the parent company's books shows the name of the principal Chinese company as Matrix Pharma Group (Xiamen) Ltd. The schedule giving the working results of the subsidiaries, however, shows the name of this company as Xiamen Mchem Pharma Group, China (I believe it is one and the same company.) The American subsidiary rang up a turnover of Rs 1.7 bn, but recorded only a marginal profit of Rs 43 m.
Some more asides
The dividend return on the considerable book value of its investments is zilch. It also gets no interest on the advances that it has doled out to its subsidiaries. But given the overall financial state of the subsidiaries, barring Astrix, any returns on this account will be a longer term proposition. Another very interesting aspect of Indian pharma companies is the moneys that they now splurge on Research and Development, both on capital account and on revenue account. It is definitely a far cry from the days when only a few pennies was grudgingly spent on this score. Matrix for example has a gross R&D asset base of Rs 1.5 bn, which is topped up each year, and it also spent a cool Rs 2.3 bn on revenue account during the year. Presumably this expenditure translates into revenues and profits at some point, though there is no way of quantifying the value addition from this spending. It is also beefing up its manufacturing capacity, and the fixed asset base relative to accumulated depreciation, is quite young. However, the complexities of this group's operations never cease to end. The company has just acquired the Research and Development facilities, along with the manufacturing capacities of the API (active pharmaceutical ingredient) plant, from guess who, Mylan India Pvt. Ltd. The latter is listed as a fellow subsidiary of Matrix India.
Somehow the show goes on, and like the proverbial curates egg, it is good in parts.
Disclosure: Please note that I am not a shareholder of this company
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.