Novartis Deal with Dr Reddy’s Reflects Chronic Poor Governance and Shortchanging Indian Shareholders
Sayali Mahashur 12 February 2022
Novartis India Ltd announced that it would transfer the sales and distribution of its products to Dr Reddy’s Laboratories for a few of its established medicines, including the Voveran range, the Calcium range and Methergine.
While Novartis claims that the arrangement aims to broaden access to these medicines beyond the current geographies to benefit many more patients, it would lead to the sacking of approximately 400 employees. The latest in a series of decisions taken over the years to weaken the Indian listed company and strengthen the unlisted entities of Novartis, this is a glaring example of poor governance, according to some shareholders. 
The annual report of Novartis India, the listed entity, claims to have 539 employees. If 400 are laid off, what remains of the listed entity? The company's press release does not mention this, nor does it say how the move would benefit the minority shareholders. Novartis claims that it has over 10,000 full-time employees. This means after the move, 98.5% of employees will be in the unlisted entities. The latest action is in a series of decisions taken over the years, inimical to minority shareholders. 
Novartis India is owned by Novartis AG, headquartered in Basel, Switzerland. The Indian pharmaceuticals market has been growing in double digits over the same time, with multiple businesses showing 15%+ growth per annum over the past decade. Multinational pharma companies have a robust business model as they are expected to introduce their existing franchise and product portfolio to address more customer segments and acquire new molecules or expand the business.
For Novartis India, however, it is disappointing to see that sales and profits have been consistently declining over the last five-year period. The trend is similar for even 10 years. Some shareholders allege that it is a deliberate strategy of hollowing out the listed entity. 
Over the past five years, sales have declined by 13% and net profit by 22%.
Potential Conflict of Interest with Unlisted Wholly-owned Subsidiary 
Novartis AG has a wholly-owned subsidiary in India – Novartis Healthcare Pvt Ltd (NHPL). Over the years, this company has been going from strength to strength, as is clear from the table below. 
The growth rate of NHPL, even after excluding the service revenues, has been much healthier than that of the listed entity. We asked Novartis the following questions 
How many products have been launched in India through NHPL compared to the number of products launched through the listed entity?
Is there anything that the management wants to communicate on how the product portfolio of the listed company differs from NHPL? 
What is the basis for deciding the split across product portfolios?
However, our e-mail to the investor relations department of the listed entity as well as to the media department highlighting our queries were stonewalled. The media relations team replied: “Thanks for reaching out. As you are aware NIL is a publicly listed entity and follows all corporate governance norms.
“There is no conflicting businesses between NIL and NHPL. Attached, please find the annual report for your ready reference.”
Overlap in Management for Both the Entities
One of the whole-time directors of NHPL is also the managing director at Novartis India Ltd. From disclosures in the annual report, we observe that Mr Sanjay is drawing remuneration as follows 
NHPL – gross salary of Rs4.5 crore for 2020
Novartis India – Rs0.72 crore for FY2021
How should the investors view the fact that the remuneration drawn from Novartis India for the MD is so far below market standards for listed companies in India? Would it not result in the MD prioritising his responsibilities at NHPL over those at Novartis India? 
In a spirit of transparency and high levels of corporate governance, Novartis India should consider appointing an independent CEO or MD who can look into the objectives and priorities of the entity full time. Good corporate governance demands that the management of both entities should be separate. 
Absence of Investments in Novartis India
Novartis India has invested less than Rs40 crore cumulative into fixed or intangible assets over the past decade. This is a very low level of investment into the business by any yardstick within the pharma, life sciences and healthcare segments.
Starting from 2013, the employee headcount is only reducing with the years. From an employee base of almost 1,300 in 2013, Novartis India today has only 539-odd employees. Out of this, 400 jobs will be terminated.
Even from a brand building point of view, the spend on advertising, both in absolute terms and as a percentage of revenue, has only been reducing through the years.
For a pharma sales force the costs are more or less fixed, while revenue depends on the availability of a strong product portfolio. We observe that other MNC pharma companies in India can deliver much higher sales force productivity and revenue per employee since they have been investing in launching new products in India.
Sharing of Infrastructure with NHPL and Commission Income
From the related parties’ disclosure in the annual report, we observe transactions between Novartis India Ltd and NHPL for many years. We requested clarity on the following –
What is the nature of engagement between Novartis India and NHPL?
Towards what scope of work is the commission income being charged to NHPL by Novartis India Ltd?
What risks does the Novartis India Ltd business assume on behalf of NHPL?
What kind of due diligence is being done by the auditors of Novartis India Ltd to ensure that the transactions are happening on an arm’s length basis and not on terms that are preferential to NHPL?
Why is the auditor remuneration the same for Novartis India Ltd and NHPL though the scale of the business is vastly different? NHPL revenue and scale of operations is almost nine times that of Novartis India Ltd.
Novartis India has not yet replied.
Lack of Clarity on Management Communication Relating to New Launches
We request that any public release or media communication management interview, henceforth, clearly mention the entity through which any new product launch will happen. 
It is very confusing for shareholders to assess whether the specific product launch will contribute to the business of NHPL or Novartis India.
Clearly, shareholders of the listed entity have been systematically shortchanged over the years. Of course, especially pharma MNCs have a long history of treating their publicly-listed companies as stepchildren and launching new and profitable products through their unlisted 100% subsidiaries. 
Pfizer of US, one of the world’s most respected drug companies, had applied and, after each rejection, mulishly reapplied to the foreign investment and promotion board (FIPB) to set up a wholly-owned subsidiary in India — not quite a fair deal for its local shareholders. 
But Novartis seems to have set a glowing example. The Novartis India board, which is a party to these decisions, consists of Christopher Snook, chairman; Sanjay Murdeshwar, vice chairman & managing director; Monaz Noble, CFO; and independent directors Jai Hiremath (promoter of Hikal Ltd), Sandra Martyres and Sanker Parameswaran.
2 years ago
Incisive expose.
2 years ago
Novartis is Diverting 5500 Cr Profit to NHC Novartis Health Care & Sandoz for last 25 yrs. Novartis Sells ONLY GENERICS , outdated 30 yr old ,Low Cost medicine like Voveran , Tegretol , Calcium , Methergin . NHC & SANDOZ Balance sheet includes only Costly, Modern ,Latest COPYRIGHT or IPR medicine ( Intellectual Property Right ) drugs . Copyrights drugs sold by NHC & SANDOZ are Vymada ( Heart failure , 650 Cr Sale , no 1 blockbuster ) , Femara ( cancer breast ) , Galvus ( Diabetes) , Luscentin ( retina degeneration) , Cosentryx ( psoriasis ) , Tasigna ( blood cancer ), KYMRIAH ( 5 Cr injection ) , ZOLGENSMA ( 17 Cr injection, world Costliest medicine ) .
Novartis sale is 400 Cr , NHC sale is 4500 Cr , Sandoz sale is 1500 Cr. Reference: Combined sale of Novartis + NHC + SANDOZ is 6400 Cr. Abbott with sale of 4000 Cr price reached 24000 Rs . If Novsrtis shows sale of 6400 Cr instead of 400 cr , what will be the price of Novartis ? Novartis employs 600 & Biome International Research centre of Novartis , NHS employs 8000 staff. Remote Control is Novartis AG Switzerland.
Dr Bharat Vyas
Replied to bharat.vyas comment 2 years ago
We should start writing and asking question to Global CEO Vas Narsimhan [email protected]
2 years ago
Management of Novartis shall remember its not only shock to 400 employees but for 400 families, with its above action it can be rated as top in worst culture and working environment .
2 years ago
How to tackle this ? Is it possible to file a case in labour court, giving the clear case of fraud and cheating on employees ? May be public litigation case ? Think it over.....
2 years ago
Novartis India limited is a fraud organization , Terminating about 400 Employees on 11th of February 2022 in India just like Thief. Shame on Novatis
2 years ago
Novartis did a right thing, since their division in this particular division were not at all working out of 400 only 40 used to work, enjoying past so many years, sitting in heavy packages but refused to follow company strategies, some group of people with some political influence created a bad shape in market, hence this could or should have been done earlier, I support it.
Replied to manractus comment 2 years ago
Do you know how much money did Novartis India Ltd earn thrugh this division of Embu, you can't imagine? Novartis has done injustice to 400 families across India, Employees across India has given their previous energy and time to the company, now at the age of 45 plus where they will go?
2 years ago
Sanjay Murdesheshwar was hired by Novartis only to terminate these 400 employees otherwise his performance has been very poor and negative. When a company hires a MD only to terminate the people then it is a shame for such a company. Shame Novartis Shame Murdesheshwar.
Replied to ighcpharma comment 2 years ago
You are Wright sir, Novartis killed 4oo families members life of their need, requirement, given full youth time to Novartis at the age of 45 plus who will give us recruitment.
2 years ago
How come laying off 400 employees without any notice is justified. Is it not like playing with the lives and rules of this country
Replied to ighcpharma comment 2 years ago
Exactly well said sir, Black days for 400 families members in India, The government of India should take legal action against such phroud organization (Novartis)
2 years ago
Novartis mis guided the company employes they decreased the field staff they stopped the investment in brand port folio an cheated the company employes
This company should be banned in India
Replied to hopper.shukla comment 2 years ago
Shame Novartis
2 years ago
In depth analysis for retail investors to remain vigil
Replied to aksinghcexjsr comment 2 years ago
And Terminated 400 Employees and their Families on Road .Shame to Novartis
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