Will MNCís make a comeback? - Views on News from Equitymaster

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Will MNCís make a comeback?

Apr 27, 2002

MNC pharma companies have been losing momentum in terms of sales growth and consequent market capitalization over the last two years. While the top 5 domestic companies recorded a revenue growth of more than 20% last year, consolidated MNC pharma growth was less than 3% with margins at half the average of domestic majors.However, MNCís have been quick in responding to this trend and the response to this has been pretty quick with most companies intensively restructuring their operations in a bid to bounce back. Here we have highlighted in brief the restructuring efforts of three major MNC pharma majors viz. Glaxo, Aventis Pharma and Novartis. Restructuring seems almost complete and a ĎVí shape recovery in the operating margins seems to be in the offing.

Novartis

  • Ciba Vision business- a lens care business, which was a drag on companyís profitability, was discontinued.

  • Introduced a new division, Consumer Healthcare to take advantage of wing OTC market in India.

  • Merger of Ciba CKD business with the company, which facilitated a better control over raw material required for the anti-TB business.

  • De-merged Seed/ Agri business into Syngenta India Ltd in line with global operations. Though this was a profit making division, revenues to a large extent were dependent on monsoons.

Aventis Pharma

  • Quick launch of new products in fast growing segments and discontining several tail end brands to reduce its exposure on products under DPCO control. Rationalization of products coupled with aggressive growth in new products helped the company reduce its DPCO coverage to 40% from 60% couple of years back.

  • Shifting manufacturing base from high cost region like Mumbai to relatively low cost areas like Goa. Funds generated from the sale of manufacturing facilities were utilized to reduce debt burden and fund a huge Voluntary Retirement Scheme.

  • Focus on key lifestyle segment and exports for fuelling growth going forward. From a mere 20% contribution to revenues in 1998 these high margin chronic segments are expected to contribute almost half the total revenues of the company by 2004.

Glaxo

  • Sacrificing sales for profitability. Completed a massive restructuring of product portfolio. Discontinued several tail end brands and focusing its promotional resources only on Ďstrategicí products with decent margins. Discontinued rural operations.

  • Hiving off / shifting base from high cost manufacturing base. Aggressively looking at outsourcing option. Completed a massive VRS scheme.

  • Exploring every possible cost rationalization strategy.

Another interesting trend, which is slowly but steadily catching up with MNC pharma companies is the marketing alliance they are logging with domestic majors. It makes perfect sense for them to leverage on their strong marketing strength to take innovative products from domestic majors to market. For example, Glaxo currently markets Cipro-D molecule, a key product from Ranbaxyís pipeline. Prior to that Pfizer teamed up Shanta Biotech to market its Hepatitis B vaccine.

Having sensed the recovery in margins of these companies, market capitalization of these stocks are already making a comeback. Markets might reward these companies further as they reap benefits from their restructuring. However, the key question is once things are set right, where would the growth come from?

It seems we would be back to square one. The patent laws are making it unviable for fast product introductions. The commitment post 2005 is anybodyís guess right now but in meantime investors would prefer sticking to companies where growth seems visible.

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