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Pharma: MNC or domestic? - Views on News from Equitymaster
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  • Mar 13, 2006

    Pharma: MNC or domestic?

    MNC pharma stocks have been in the reckoning over the past few months aided by news of new product launches. In this write-up, we shall find out how these companies have fared in the recently concluded quarter and what are the prospects going forward. We have included the companies, Glaxo, Pfizer and Novartis for the purpose of our analysis.

    MNC pharma: A comparison
    (Rs m) Dec-04 Dec-05 Change
    Net sales 5,622 6,296 12.0%
    Expenditure 4,495 5,202 15.7%
    Operating profit (EBIDTA) 1,127 1,094 -2.9%
    EBIDTA margin (%) 20.0% 17.4%  
    Other income 299 401 34.1%
    Interest (net) 5 2 -60.0%
    Depreciation 95 92 -3.2%
    Profit before tax 1,326 1,401 5.7%
    Tax 488 451 -7.6%
    Extraordinary item (242) (123)  
    Profit after tax/(loss) 596 827 38.8%
    Net profit margin (%) 10.6% 13.1%  
    * Includes Glaxo, Pfizer and Novartis

    What does the analysis say?
    As can be seen from the table, the combined topline of the three companies have risen noticeably on the back of a strong performance of their pharmaceuticals business (especially the top brands). Most of these companies have also been focusing on reducing the contribution of 'drugs under price control', which have also helped matters. However, margins were under considerable pressure largely due to a spurt in raw material and staff costs. Rise in raw material costs was attributed to the increase in purchase of finished goods, which is due to higher excise duty paid on formulations purchased from third parties. Bottomline posted a decent double-digit growth largely due a considerable rise in other income and fall in depreciation charges.

    The scenario back then...
    In the past, MNC companies were slow in launching products due to the absence of the product patent law in the country until January 01, 2005. It must be noted that in the 1980s, both domestic and MNC companies cornered an equal slice of the Indian pharma pie. With the government giving recognition to only process patents in the country, many domestic pharma companies thrived on the back of superior 'reverse engineering skills.' This also made the MNC companies averse to launching global products in the Indian markets. Consequently the share of MNC companies reduced from 50% in 1980 to around 23% in 2004 (Source: ORG-IMS).

    Back in the limelight...
    Nevertheless, in recent times, MNC pharma stocks have considerably run up. The optimism is on the back of the fact that most of these companies are planning to accelerate the pace of product launches from their respective parent's portfolio or are undergoing restructuring exercises. Also, intense competition and price erosion in the global generics space has probably shifted the focus from domestic companies focusing on the exports markets to MNC companies, which have a relatively stable revenue stream. While Pfizer has already launched three products parent's folio in the last two months, Glaxo has four products lined up for the Indian market. While this a very positive step, it could take around two to three years for these new products to capture significant market share and investors need to accordingly attune their investment horizon.

    What to look out for?
    We remain positive on the growth prospects of MNC pharma companies due to their growing commitment in launching products, which we believe will be the most important factor in giving them an edge over their domestic peers in the Indian market. Having said that, there are certain points, which an investor cannot afford to ignore:

    1. Strength of the parent company's pipeline: We believe that a rich product pipeline of the parent company will ensure a steady flow of new products into the domestic market as well. Therefore, the R&D pipeline of the parent assumes significant importance.

    2. Relevance of the Indian company to the parent: A rich pipeline by itself will have no significance unless the parent company also takes an interest in the Indian subsidiary in contributing to its overall operations. A significant commitment of the parent will definitely propel the launch of products into the country.

    3. Risk of a 100% subsidiary: If the parent company launches products, through its 100% subsidiary and not through the listed entity, investors could lose out significantly in the long term.

    Nevertheless, the introduction of the patent law has been a major transition in the Indian pharma market and despite issues, is likely to signify exciting times ahead for MNC pharma majors.



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