Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma valuations: a skewed medicine - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 29, 2000

    Pharma valuations: a skewed medicine

    Would you believe that the market capitalisation of Ranbaxy is more than the combined market capitalisation of Glaxo, Pfizer, SmithKline Pharma, Hoechst Marion Roussel, Burroughs Wellcome, E Merck, German Remedies, Knoll Pharma, Fulford and Abbott Laboratories put together?

    Ranbaxy is among the premier Indian pharmaceutical companies. It has an overall market share of 5.1%, owns 17 of the top 300 pharma brands and its width extends to almost 68% of the therapeutic area. It’s the market leader in antibiotic and antibacterial segments. Last year, Ranbaxy entered into a marketing arrangement for its new drug delivery system for ciprofloxacin with Bayer ABS. The company has ambitious plans to target the generic markets in the future. It is targeting one Novel Drug Delivery System every 18 months, filing ten Abbreviated New Drug Applications (ANDAs) every year and has two molecules under trials.

    However, there are problems. The domestic formulations market has grown by hardly 7% in FY2000 and the company has not been immune from the trend. While the comany did succeed in maintaining operating margins for the full year, Ranbaxy’s fourth quarter was particularly disappointing with exports bailing out the company. (Exports contributed around 50% of the fourth quarter sales which grew overall by 3.6% vis-ŕ-vis the third quarter). Technology licensing income (from Bayer) accounted for 20% of the company’s pre-tax profit for the full year.

    The current year seems to be no different. Domestic formulation sales growth still seems to be in single digits. Usually, antibiotic sales are relatively lower post November and the current quarter is unlikely to be an exception. The Bayer deal is expected to bring in another $ 25 million in the current year. This works out to a pre–tax earnings of around Rs 10 per equity share, which is impressive no doubt.

    But one is not sure whether it justifies a market capitalisation that is more than the combined market capitalisation of Glaxo, Pfizer, SmithKline Pharma, Hoechst Marion Roussel, Burroughs Wellcome, E Merck, German Remedies, Knoll Pharma, Fulford and Abbott Laboratories put together.

    One reason for the stark difference in valuation between Ranbaxy and the multinational companies put together could be the concerns that investors have about these MNCs converting their existing operations into trading companies. The strategy that some of these seem to be following is (a) milk existing brands by transferring manufacturing to low-cost third parties and reduce overheads through VRS and the closure of own plants; (b) transfer profits where feasible through royalties and technical know how fees and (c) launch drugs through fully-owned subsidiaries. However, some large MNC's (e.g., Glaxo, Hoechst) are introducing more products and exploring possibilities of tie-ups and alliances to leverage their existing distribution strengths and franchise.

    What the fundamentals are...
    (Rs m) Sales PAT As % of Ranbaxy's ROE* 3 year
    Sales Profit
    Ranbaxy 15,582 2,012     12.5% 10.5%
    Glaxo 8,855 771 56.8% 38.3% 19.5% 11.1%
    SmithKline 3,295 247 21.1% 12.3% 21.0% 16.9%
    Pfizer 3,645 309 23.4% 15.4% 22.0% 10.4%
    Hoechst 5,536 200 35.5% 9.9% 17.0% 3.0%
    Burroughs Wellcome 2,001 293 12.8% 14.6% 21.8% 2.8%
    E Merck 2,780 181 17.8% 9.0% 24.5% 10.6%
    German Remedies 2,080 290 13.3% 14.4% 29.2% 13.3%
    Knoll 2,910 685 18.7% 34.0% 40.9% 7.7%
    Fulford 1,060 (50) 6.8%   - 2.9%
    Abbott 998 45 6.4% 2.2% 11.3% 13.1%
      33,160 2,972        
    * - Three year average

    In both cases, clearly, sentiment seems to have run ahead of fundamentals.



    Equitymaster requests your view! Post a comment on "Pharma valuations: a skewed medicine". Click here!


    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)