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Pfizer: An eventful year ends

Feb 13, 2009

Performance summary
  • Sales grew by 1% YoY during CY08. However, excluding sales from the 4 consumer health brands sold in December 2007, revenues for the full year clocked a decent 12% YoY growth.
  • Operating margins contract by 1.1% during the year due to an increase in raw material costs (as percentage of sales).
  • While the bottomline during CY08 declines by 12% YoY, if one excludes the extraordinary income during both the periods, then the bottomline registers a growth of 10% YoY.
  • The Board recommends dividend of Rs 12.5 per share for the full year (dividend yield of 2.4%).

Financial performance: A snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 1,852 1,848 -0.2% 6,966 7,006 0.6%
Expenditure 1,586 1,581 -0.3% 5,383 5,494 2.1%
Operating profit (EBIDTA) 266 268 0.7% 1,584 1,513 -4.5%
Operating profit margin (%) 14.4% 14.5%   22.7% 21.6%  
Other income 145 201 38.4% 450 705 56.6%
Depreciation 15 44 187.7% 96 111 16.1%
Profit before tax 396 424 7.2% 1,938 2,107 8.7%
Exceptional items (expense) (26) (8)   2,563 2,079 -18.9%
Tax 149 114 -23.2% 1,112 1,194 7.4%
Profit after tax 221 302 36.9% 3,390 2,991 -11.8%
Net profit margin (%) 11.9% 16.4%   48.7% 42.7%  
Net profit margin (excl. extraordinary items) 38.2% 16.8%   18.5% 18.3%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)**         30.6  
P/E ratio (x)*         17.3  
(*On a trailing 12-month basis) (**Excluding extraordinary items)

What has driven performance in CY08?
  • During CY08, Pfizer’s topline grew by a mere 1% YoY. However, what needs to be noted is that figures of CY07 included sales from the 4 consumer healthcare brands, which were not there in CY08 as they were sold to Johnson & Johnson. Thus, on a like-to-like basis, revenues registered a decent 12% YoY growth led by 7.5% growth in volumes and 4% increase in prices. Pharmaceuticals (up 12% YoY) and animal health (up 22% YoY) businesses were the key growth drivers. Growth in the pharma business was driven by the company’s key brands ‘Corex’, ‘Dolonex’ and ‘Minipress’ all of which recorded a double digit growth. Revenues from the consumer health business, which Pfizer has retained with itself posted a 4% YoY growth for CY08. The company made 16 product launches during the year, which included the smoking cessation drug ‘Champix’ and the cardiovascular drug ‘Accupril’.

    Segmental performance
    (Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
    Pharmaceuticals (incl. services) 1,618 1,554 -3.9% 6,045 5,948 -1.6%
    PBIT margin (%) 19.8% 15.6%   26.1% 61.6%  
    Animal health (incl. services) 157 209 33.3% 684 832 21.6%
    PBIT margin (%) 2.0% 18.4%   16.0% 21.3%  
    Services - Clinical            
    Development Operations 57 81 42.3% 210 216 3.0%
    PBIT margin (%) 11.5% 71.1%   12.0% 35.6%  
    Total revenues 1,831 1,845 0.7% 6,939 6,996 0.8%
    Total PBIT margin (%) 18.0% 18.3%   24.7% 56.0%  

  • Pfizer’s operating margins shrunk by 1.1% during CY08, which was largely due to the rise in raw material costs (as percentage of sales) from 20.7% in CY07 to 23.5% in CY08. Raw material costs increased largely due to the increase in Vitamin C prices. Further, because vitamins fall under price control, the increase in raw material costs could not be passed on in the form of higher prices, thereby exerting pressure on margins. The company does not expect this scenario to ease in the coming two quarters and hence margins are likely to come under pressure. Other expenditure increased due to advertisement expenses incurred on the new drug launches.

  • While Pfizer’s bottomline declined by 12% YoY during the year, if one excludes the extraordinary items during both the periods, then the bottomline registered a 10% YoY growth driven by higher other income.

What to expect?
At the current price of Rs 513, the stock is trading at a price to earnings multiple of 10.5 times our estimated CY10 earnings. Pfizer’s operating margins are expected to be under pressure going forward as higher raw material costs continue to play spoilsport. As far as new product launches are concerned, the company has some lined up for the second half of CY09 although none of them will be patented in India. Pfizer is also looking to increase its reach to doctors and the focus will be more on metros and tier I, II, III and IV cities before it ventures into rural areas. We maintain our positive view on the stock.

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