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Pfizer: Margins counter lower sales growth

Jan 31, 2012

Pfizer India has announced its third quarter results for 2011-12 (3QFY12) results. The company has reported 3.2% YoY growth in sales and 10.8% growth in net profits. Here is our analysis of the results.

Performance summary
  • Sales grow by slower rate of 3.2% YoY led by slower growth in the core pharmaceuticals division and a de-growth in the services income
  • Operating margins increase by 80 bps (0.8%) to 19.2% due to decrease in raw material cost and other expenditure. However, the increase in employee expenses restricted further margin expansion.
  • Net profits increase by 10.8% YoY on account of higher other income and decrease in depreciation

Financial performance: A snapshot
(Rs m) Quarter end Nov, 2010 Quarter end Dec, 2011 (3QFY12) Change 9m ended Nov, 2010 9m ended Dec, 2011 (9mFY12) Change
Net sales 2,623 2,706 3.2% 7,251 8,217 13.3%
Expenditure 2,140 2,187 2.2% 5,883 6,763 15.0%
Operating profit (EBIDTA) 483 519 7.4% 1,368 1,454 6.3%
EBDITA margin (%) 18.4% 19.2%   18.9% 17.7%  
Other income 203 229 12.6% 577 671 16.3%
Depreciation 24 23 -4.1% 71 72 1.7%
Interest - -   - -  
Profit before tax 662 725 9.4% 1,875 2,053 9.5%
Tax 224 238 6.6% 637 684 7.5%
Exceptional Gain / (Loss) (3) (4)   (30) (4)  
Forex Gain / (Loss) - -   - -  
Minority Interest - -   - -  
Profit after tax/(loss) 436 483 10.8% 1,208 1,365 13.1%
Net profit margin (%) 17% 18%   17% 17%  
No. of shares (m) 30 30   30 30  
Diluted earnings per share (Rs)*   61        
Price to earnings ratio (x)*   19.5        
*On trailing 12 month basis

*The company has changed its accounting year from 1st December - 30th November to 1st April-31st March. The current quarter is from 1st October, 2011 to 31th December, 2011 while the comparable quarter was from 1st September, 2010 to 30st November, 2010. Hence the figures are strictly not comparable.

What has driven performance in 3QFY12?
  • Pfizer sales growth was limited to 3.6% YoY during the quarter due to lower growth from its pharmaceuticals division coupled with a fall in clinical services sales. The pharmaceutical division (contributes ~82% to sales) grew merely by 5.9% YoY.

  • The clinical services business (mainly clinical trials) surprised on the downside showing de-growth of 26.5% YoY. The animal health segment (contributes ~13% to sales) grew by a modest 12.3% YoY due to discontinuation of one product.

    Revenue break-up
    (Rs m) Quarter end Nov, 2010 Quarter end Dec, 2011 (3QFY12) Change 9m ended Nov, 2010 9m ended Dec, 2011 (9mFY12) Change
    Segment Revenues            
    Pharmaceuticals 2,056 2,178 5.9% 6,008 6,675 11.1%
    Animal Health 302 340 12.6% 867 981 13.1%
    Services 249 183 -26.5% 478 550 15.1%
    Total Sales 2,608 2,702 3.6% 7,353 8,206 11.6%
    Segment EBIT Margins            
    Pharmaceuticals 27% 28%   28% 24%  
    Animal Health 9% 10%   13% 17%  
    Services 12% 7%   12% 9%  

  • As per the IMS data, Pfizer is said to have grown at a market rate of 14% YoY for the quarter with brand Lyrica and Claribed growing at 28% YoY and 37% YoY respectively.

  • The operating margins increased by 80 bps (0.8%) to 19.2%. Change to better product mix led to a decrease of material costs by 220 bps. The other expenditure also decreased by 70 bps and can be attributed to lower overheads and better productivity. However, increase of 210 bps in employee expenses, due to the field force expansion and transfer of 200 MRs from Wyeth, restricted further margin expansion.

  • The net profit increased by 10.8% YoY on account of margin expansion and other income growth of 12.6 YoY.

  • Pfizer has now launched two insulin brands (Univia and Glarvia) in the Indian market which it sources from Biocon. A special dedicated field force is established to market these products with special focus in the hospital and rural markets.

  • In the pharmaceutical business, Pfizer has been aggressively introducing products in the branded generics space since 2009. Currently, the branded generics segment contributes around 4% to the net sales but it is expected to increase to 10% of sales in the next 2.5 to 3 years. The management indicated speeding up product launches in this category. The company has plans to launch around 10-15 in the next 6 months.

  • As indicated by the management, Pfizer has transferred the Animal health division (contributing nearly 13% to total sales) to a fully own subsidiary.

  • In accordance with the international merger, Wyeth will soon merge with Pfizer in India. After the merger, the new merged entity is expected to be the 9th largest in India in terms of total sales.

What to expect?
The company had invested in creating pipeline of over 20 branded generics products in the past 2 years and has also increased the field force (in last 2 years field force is up by 1,400). Pfizer has also been incurring higher expenses to promote its products. It also intends to enter into newer segments such as CNS and diabetes. The company is aggressively promoting Prevnar 13 vaccine (only vaccine in India for pneumococcal disease) to get incremental revenues. The company is also focusing to improve its field force productivity and should be able to rationalize the costs ahead. We have seen some minor benefits on this front in this quarter and further expect to accrue benefits in the next 6 months.

At the current price of Rs 1,187, the stock is trading at a multiple of 13.4 times our estimated FY14 earnings. After taking into account the future growth prospects, current valuations looks attractive and we recommend a 'Buy' on Pfizer at the current market price.

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