KARACHI, July 6: A company bench of the Sindh High Court has taken serious notice of continued losses suffered by the Pfizer Laboratories mainly because of transfer-pricing in raw material imports from its parent company, the US-based Pfizer Inc.

This has proved oppressive to the minority shareholders of the company and it inflated prices of medicines for Pakistani consumers.

The high court’s company bench, comprising Justice Gulzar Ahmad, declared the conduct of Pfizer Inc., the parent company of Pakistan-based Pfizer Laboratories, as “oppressive” towards its subsidiary and its minority shareholders, and ordered payment of compensation.

The judge has referred back the matter to the valuators, and also questioned the management of the Pfizer Laboratories.

The case has its origin in the proposed merger and amalgamation of Pfizer Laboratories and Parke-Davis that came up for approval in a company bench of the Sindh High Court in May 2001.

After a series of hearings during August 2001 to April 2002, the court declined to sanction its approval to the merger of Pfizer and Parke-Davis, and gave a directive to the majority shareholders to pay compensation to the minority shareholders of two companies — Pfizer and Parke-Davis — at reasonable price.

For this purpose, an independent valuator was appointed, who furnished a report that was said to have overlooked a key factor known as ‘transfer-pricing’.

Therefore, another valuator was appointed who furnished report in May 2003 on which objections were filed and Justice Gulzar’s ruling in May this year is based on the application.

Justice Gulzar’s ruling is based on `transfer-pricing’ factor and he relied entirely on the report given by the valuator.

Three specific instances of transfer-pricing have been given in the report which has been quoted by the learned judge.

Amlodepine Besylate, the active ingredient of Norvasc is imported by Pfizer Laboratories at $30,000 per kg. Its price from alternative source is said to be only $500 a kg. Piroxicum, the active ingredient of Feldene is imported at a cost of $8,750 a kg. Its price from alternative source is just $125.

Doxicycline, the active ingredient of Vibramycin, is imported at $4,700 a kg. It is said to be available at $60 from the alternative sources.

In his ruling, Justice Gulzar extensively quoted the auditors report, according to which the company generates its revenues from a portfolio of 22 brands, of which five products contribute 70 per cent of the total revenues. However, the two top products of the company are being sold at a gross loss even though both these products — Norvasc and Vibramycin — are well-established and hold the second and first positions, respectively, in terms of market share in their respective drug categories.

These products have become controversial in various related government departments, primarily due to issues raised by the income tax authorities relating to purchase cost of the respective active ingredients of these products.

These active ingredients are being purchased by the company (Pfizer Laboratories in Pakistan) from its parent company (Pfizer Inc. in US), and the tax authorities have assessed these transactions as not being at arms length.

The ministry of health is also cautious while taking any decision with respect to increasing the prices of these products.

The accumulated losses of Pfizer Laboratories mounted to Rs930.3 million in the year 2002 from Rs336.7 million in 1998. The 176 per cent increase in losses wiped out more than 90 per cent of equity invested by the shareholders.

Owing to dismal liquidity situation, the Pfizer Laboratories borrowed funds from the parent company in the US. These funds were converted into equity through issues of right shares.

The conclusion that can be drawn from auditors’ report is that transfer-pricing and its financial standing on local Pfizer and to its minority shareholders have been negative. The company has not distributed any dividend since last 10 years.

Consumers in Pakistan, too, suffered and were being made to pay double and treble the prices of drugs as compared to India.

The court ruling is considered unique as it has raised question of morality on transfer-pricing of which most of the 28 multinational pharmaceutical firms in Pakistan are being blamed.