Caplin Point Laboratories

Stock Opportunities Untested - but worth a good look
81

**

Yes, this is a serious thing and after coming across the same, we have updated about it in our blog post -http://dalal-street.in/can-fin-homes/ Link: http://dalal-street.in/can-fin-homes/

Morally, I would not like to be part of such a co.

We tried doing some google searches and came across one more article as recent as 2009 too -http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt Link: http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt

Also, if one observes the names mentioned, there is a slight change in spelling. Things don’t seem comforting.

We have taken an exit.

Regards,

Ayush

This There http://www.watchoutinvestors.com/default2a.asp Link: http://www.watchoutinvestors.com/default2a.asp **

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Last 2 comments from Kiran and Sidhharth - are deleted temporarily. Both have been requested to repost the content again ensuring proper word-wrap.

One of these posts was causing formatting error - causing the entire forum to scroll freely sideways.

-Admin

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Sorry admin - that link was a cached link and it somehow whacked the text box.

Reposting, without the link -

Hi Ayush,

The Times of India article actually says that Caplin complained to FDA about Strepoken injections being faked and not vice-versa (here’s a clearer article - “Google search for Caplin Point+FDA complaint and access the cached content of the Mumbai Mirror link (since the normal Mumbai Mirror link is leading to a technical error”)

The senate document also talks about charging Caplin’s MD (assuming that they’ve got the spelling wrong and it is the same current Chairman that we are talking about). Charging someone is different from proving someone guilty. I am not sure how we jumped from this to that (smoke-fire-sure).

Disc: Invested, although it forms a small part of my overall portfolio.

85

The link to document containing Caplin point’s fake drugs, came as a real shocker. Thanks to those who investigated it(Bhushan,Ayush,Subash,Donald) and posted the link. That really was a black swan event in my portfolio. Ideally we should have investigated the company from fake angle as well, so in future, we won’t label these events as black swan, as there are numerous links already available online to verify the genuineness of the company. Once the confidence is shattered, it is very difficult to remain invested and sleep well even when the stock appears a value. As they say “When in doubt, stay out” is what I did. Had 5% of portfolio invested and sold out at 20% loss. Could have increased holdings to 10% but for lack of funds(thank heavens). A lesson learnt on how always to do a fake analysis, before the business analysis. Every bounce from here on can be used to get out unless you can sleep well with the hard-hitting facts.(a possible tiny allocation)

86

Ayush Ji,

The link says Caplin as original manufacturer & not the fake one.

-http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt Link: http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt

87

Wahoo!!! We guys seem to have assumed Caplin as guilty without noting-

  • That the Senate link was just an allegation
  • The date & person in the allegation

How about a link that puts our ownloving Ajanta Pharma in the list of fake producers-

http://www.pharmaceutical-int.com/news/dangerous-fake-viagra-drugs-on-sale-in-uk.html

Should we keep holding our Ajanta stock even after readingthis link?

Disclosure- Long Caplin. Long Ajanta

1 Like
88

Hi Jatin,

Who are we to assume Caplin guilty for the allegation. We are bunch of small investors who are trying our best to find hidden gems by our collective effort, and avoid potential landmines (as Vivekji says indian markets is full of landmines). Therefore quick sell of Caplin post finding such article. I wont stand at a place with potential landmine until it is proven in indian supreme court that the place where I am standing is indeed a landmine. With high probability I will be dead by then.

As far as Ajanta is concerned Kamagra is a licenced branded product of Ajanta and is not a fake drug. The issue here is that their drugs are sold without medical pescription, and that can be dangerous to the user, but Ajanta has no control on fools who buy this without pescription. The issue is not validity of the drugs or legality of the same.

Regards,

-Subash

ownloving Ajanta Pharma

http://www.pharmaceutical-int.com/news/dangerous-fake-viagra-drugs-on-sale-in-uk.html Link: http://www.pharmaceutical-int.com/news/dangerous-fake-viagra-drugs-on-sale-in-uk.html

readingthis

89

Subash,

Saying it is risky & may be a landmine is completely different from saying it is a landmine. If you read the past few comments, it looks like we guys have assumed all of Caplin’s revenues is from fake drugs only. That what I din’t like.

At the end of the day, for every buyer there is a seller. And both think they at right.

Regards,

Jatin

Regards,

-Subash

90

Kiran & Jatin,

My bad - the 2009 article doesn’t seem to be on the same line of the earlier articles. But the earlier PDF has enough details that earlier the co was into fake drugs scandal and this is why they had to re-start the co later. They might not be doing it now.But given the previous history and the current business model - wherein the co is supplying tounregulatedmarkets which are highly risky and small, I think its better to be careful.

It would have been better if the co was getting these advances due to superior or unique products etc.

Regards,

Ayush

PS: Please take your own call. It really depends on one’s risk profile.

Ayush Ji,

The link says Caplin as original manufacturer & not the fake one.

-http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt Link: http://articles.timesofindia.indiatimes.com/2009-02-24/mumbai/28008330_1_fake-drug-chennai-and-gufic-biosciences-chandrabhagat-pharma-pvt

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I think it’s a matter of taking a principled stand on the kind of promoters we want to be associate with. How the share prices will move and how the company will do in future is a different matter all together.

Reminded of this quote from Seth Klamran - "“Don’t get in bed with bad people [corporate management].”

92

It doesn’t help when the company faces allegations as damning as above. Personally, I am extremely uncomfortable with any serious allegations, so will STAY AWAY. If I can’t make serious allocation of Capital, why bother?

But let’s shift the discussion back to gaps in the story - there are many things that don’t add up.

1). A completely me-too product range (analgesics, anti-infectives,etc) that everyone knows is hugely competitive, very low margins - but company’s cash flows/financials seem to tell a different story

2). The company obviously does not find it viable to supply/compete in the domestic market (~90% is exports); but works out viable (very profitable) business models in far away minuscule (unregulated?) South American and African markets

3). When questioned about its biggest markets by individual investors/analysts (Kiran) - Brazil & Mexico are cited (in company website these were planned for 2012), but to Institutional analysts Nicaragua, Honuras, Gautamela are cited. (This was highly disturbing for me - putting up a different face for different audiences!). Some of these countries have an annual pharma market of ~200 Cr only.

4). The main attraction in company’s cash flows/financials - Advances of 41 Cr! This is practically financing the new expansion of injectibles! A very happy situation to be in for sure.BUT why would distributors pay 6m Advances for these kind of low-end generics products? why would these be sustainable??

Individual and Institutional analysts did not seem to have got to the bottom of this crucial question, despite my constant egging:)

5). I would stick my neck out and say - The company seems to have workable business model for small unregulated markets. In a few markets (Gautemela, Honduras, Guinea) the business model is so formidable as to command big Advances from distributors (reasons not known at the moment). Safe to say the company would find it pretty difficult to expand presence in bigger semi-regulated markets like Brazil & Mexico. The current business model may not be replicatable (for existing product range).

In my book, we need to have convincing answers on these fronts. We need to be able to reconcile inconsistencies in the overall story (at the moment I find there are just too many, of course without the benefit of a management interaction).

Can some of the bulls in the story (nothing wrong with that:)) make attempts to defend/answer the above inconsistencies that I see.

Thanks

)- Donald

PS: What may be differentiating this company from 1000’s of small companies manufacturing similar product range is the China advantage. Chairman’s son Siddharth has reportedly spent last 5 years in China working out quality sourcing.

93

Donald,

Addressing most of the inconsistencies-

1). First, the allegation was more than a decade ago (similar argument was given when i posted about Wimplast’s Pradip G Rathod’s involvement with Sanjay Dangi in price rigging, but we are staying in there and staying away here!). Secondly, if someone can make fake drug, it can also make fake packaging. Why will someone write one’s company’s name on fakes. One can write anyone’s name. The info I have from my sources is that the fake drug makers used caplin’s packaging.

2). Co is intogeneral medicines because of the business model it has. It targets GPs in 3rd world countries. GPs mainly prescribe general medicines. Specialist doctors prescribe speciality medicines like cardiac, dermatolgy etc. Co’s distribution model is not MR-driven but pharmacy-driven. In India, pharma distribution is MR-driven and hence is a totally different game. Comapny is trying MR-driven model in Africa on pilot.

3 &4&5). It does not sell to distributors but controls distribution there because of years spent by promoters in central american countries. Promoters also have marital ties with natives there. It sells in smaller central americal countries you mentioned and not inbrazil or mexico. Effectively, pharmacies are its customers and that explains advances. Being a manufacturer cum distributor, it offers medicines at much lower prices in lieu of advances.

4). Advances/sales will not sustain when its injectible plants commence in the 2nd half of this fiscal, as that will be a totally different business model. It is likely to be contract manufacturing for other pharma companies.

5 The big story here is that of injectible plants and the kind of valuation at which Strides, Claris and Orchid (Hospira)have sold their injectible businesses. All these three were saddled with huge debts. Caplin will have no debt even afterputting up 80crore injectible plant. This plant will be able to generaterevenues in excess of company’s current revenues at full capacity utilisation.

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Hi Donald,

I think I heard it wrong the last time.

So, here are a few details -

a) Caplin tried a foray into Brazil and Mexico but couldn’t gain a foothold in those markets since Aspen (a $2B co.) follows the exact same model as Caplin. Since Aspen is big (and can source RM much cheaper than Caplin), Caplin couldn’t gain a foothold through a similar business model. Caplin is trying to strike strategic alliances with big pharma in Mexico now instead of the distributor model.

b) Their top markets (and I reconfirmed) are Gautemala, Nicargua, El Salvador, (I missed the 4th country) and then Honduras.

c) The management is trying to tap into semi-regulated markets primarily (which is more or less South American countries and a few Asian countries). Their next foray (I think they have already started registering products) is in Costa Rica, Panama, Bolivia, Ecuador, Haiti and St. Louis.

d) The CP-IV plant (injectibles) - they are planning to start commercial production in Sept. 2013.

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Hi Guys,

I’m new to this forum. My name is Sachin Francis and I’m an investor in both Ajanta and Caplin too. I second Subash sir’s opinion. We are investing hard earned money and sometimes we just pull the trigger on one bad info. We have no control over people buying medicines without prescription and I really wonder if anyone would actually go to a doctor to get a prescription for an erectile disfunction drug which is Kamagra.

I’m going long on both these companies.

Regards,

SF

Wahoo!!! We guys seem to have assumed Caplin as guilty without noting-

  • That the Senate link was just an allegation
  • The date & person in the allegation

How about a link that puts our ownloving Ajanta Pharma in the list of fake producers-

http://www.pharmaceutical-int.com/news/dangerous-fake-viagra-drugs-on-sale-in-uk.html Link: http://www.pharmaceutical-int.com/news/dangerous-fake-viagra-drugs-on-sale-in-uk.html

Should we keep holding our Ajanta stock even after readingthis link?

Disclosure- Long Caplin. Long Ajanta

96

Hi Donald,

The information that you have mentioned about some of these countries having a total market of 200 cr. is correct. But the information posted by IMS about the value of market comes from only prescriptions that they collect from the pharmacies. They do not take the total value of generic drug market nor the value of govt tender bids. Most of the times, these two overweigh the prescription market by a long way.

Regards,

SF

97

After giving some though, I felt that most likely we are over-reacting to a very old news, connecting dots in a wrong way to get a wrong picture of the company. As all of us know the recent 2010 news is actually not painting Caplin in a bad way.

To me Caplin Point is a very small pharma company, who can’t even compete in India (forget US/UK/Brazil/Mexico etc). It is trying to carve a niche for it by working in unregulated small market where big pharma guys wont find any value in it. By going at past record, it seems to be doing pretty good there. What attracts me to Caplin is its debt free approach of expansion and its new venture into less crowded injectable space.

At a pe of 6, and dividend yield of 3%, this 20+ roe debt free growing company is fundamentally looks attractive to me. Being small Mcap <100cr, I feel this can’t take a very high %age allocation in your portfolio, but still can be combined with 3-4 such nice microcap to get a low pe, high roe, good growth microcap sub-portfolio.

1 Like
98

Now Ranbaxy accepted that it faked drugs in 2005-06.

Caplin’s was just an allegation in 2001.

__

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@RasKhem, Can you please put up a link where it’s mentioned about Ranbaxy producing fake drugs ?

From what i read, it’s about "pleaded guilty on Monday to felony charges related to drug safety and will pay $500 million (Rs.2,740 rore) in civil and criminal fines under the settlement agreement with the U.S. Department of Justice.

http://profit.ndtv.com/news/corporates/article-ranbaxy-whistleblower-thakur-to-get-rs-266-crore-322186

Are you talking about this same issue as in this link ?

100

Thanks Rashmee and Kiran for the clarifications:

1). Advances

The information I have is that Advances are mainly from 3 countries - Gautemela, Honduras and Guinea. Management is confident of sustaining Advance model here.

From what I have understood from you, Advances are given by retailers (pharmacies) to ensure they get the medicines at lower rates (from the company) than they would have received from local distributors. The company is able to supply in these countries perhaps because they have drug import licenses because of local ties.

This is good to have, but clearly this is not a scalable model (replicatable in most countries they operate in e.g., or new countries that they expand to).

Please comment/elaborate if you read any differently.

2). Future growth -Existing Business

If the existing business has to grow 20-25%, clearly this has to come mainly from expanding geographical presence. While expanding into new countries, they will have to go through the country distribution model, and will not enjoy the advantages they historically did.

I would go further to say that the Inventory and Debtors situation could change drastically.

Please comment.

3). Future Growth - Injectibles

As I understood from AR 2012, manufacture of Injectibles is intended for export to regulated****markets. Any idea on the status of plans forapproval of the plant andregistration of product lines with the regulatory authorities??

Looks to me any significant revenues from this segment is atleast 2 years away.

Please comment. If someone is familiar/studied the Injectibles space please educate on how competitive a space that is, what kind of margins apply, how difficult or easy will it be for a newcomer to garner market share from I assume existing, established players.

The positives are that it has opened up new revenue streams (Injectibles) mostly thru internal funding. It has halved Inventory and Debtor levels over last 5 years, and because of the current Advances situation, Working Capital requirements is at~1% from earlier 20%+ levels.

But if I project the future, I cannot be gung-ho that this rosy picture will continue. I rather anticipate deterioration on every front in the coming 2-3 years, if the company grows/wants to grow significantly i.e. 20-25% plus cagr basis.

So I am at a loss to understand the excitement in this counter:). What exactly is so exciting in this business? Look forward to be corrected/educated.

-Donald

101

Raj,

http://features.blogs.fortune.cnn.com/2013/05/13/ranbaxy-guilty/

This link mentions that Ranbaxy accepted that it sold adulterated drugs.

Donald,

Caplin is not exciting, its drugs (viagara/cialis) are. :slight_smile: