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Pfizer: Bright future ahead? - Views on News from Equitymaster
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  • Jun 10, 2005

    Pfizer: Bright future ahead?

    With the product patent regime now in force in India from the start of 2005, MNC pharma companies stand to gain as new product launches will spur growth for these companies in the coming years. MNC pharma major Pfizer is one of these companies. In this article, we take a look at the past performance of the company and future prospects.

    (Rs m) Nov-02 Nov-03 Change Nov-04 YoY Change 1QNov-05 YoY change
    Net sales 5,424 4,746 -12.5% 5,578 17.5% 1,329 -2.9%
    Expenditure 4,788 4,409 -7.9% 4,919 11.6% 1,101 -8.2%
    Operating profit (EBIDTA) 636 337 -47.0% 659 95.5% 228 34.4%
    Operating profit margin (%) 11.7% 7.1% -39.4% 11.8%   17.2%  
    Other income 538 368 -31.6% 392 6.5% 87 5.8%
    Interest (net) (50) (32) -36.0% 8   2 -37.5%
    Depreciation 106 108 1.9% 103 -4.6% 29 52.3%
    Profit before tax 1,118 629 -43.7% 940 49.4% 284 23.4%
    Exceptional items 148 1(167)   (192) 15.0% (58) 12.5%
    Tax 505 188 -62.8% 293 55.9% 92 20.9%
    Profit after tax 761 274 -64.0% 455 66.1% 134 30.8%
    Net profit margin (%) 14.0% 5.8%   8.2%   10.1%  
    No. of shares (m) 28.8 28.8   28.8   29.8  
    Diluted earnings per share (Rs)* 26.4 9.5   15.8   18.0  
    P/E ratio (x)           41.0  
    (* annualised)              

    About the company
    Pfizer India is a 40% subsidiary of the world's largest pharmaceuticals company - Pfizer Inc. It has some strong brands in its portfolio like Corex (a cough syrup) and Becosules (a B-complex supplement), both being more than Rs 1 bn brands each. The company has merged Parke Davis and Pharmacia with itself. Pfizer derives most of its revenues from the pharmaceuticals division (86%). The company also has presence in the animal health (10%) and clinical development operations (4%) segments. In the pharma segment, merger with Parke-Davis and strong brands like Benadryl, Corex and Gelusil are the key drivers. In the animal health segment, Pfizer plans to capitalize on its parent's global leader status and become a major player. The company is also evaluating the inorganic growth strategy in this segment. Pfizer also carries out clinical trials on behalf of its parent.

    Performance over the years
    2002:  The amalgamation of the erstwhile Parke Davis with the company took place this year. During the year, the pharmaceuticals division was under pressure due to the phased discontinuation of the vaccine business, non-realisation of the budgeted price increases for some of the company's key brands as there was a delay in announcement of the new DPCO. Also, there were re-structuring exercises undertaken due to the merger of the Pfizer field force and the erstwhile Parke Davis field force. Despite this, its key brands like Corex and Benadryl managed to post 15% YoY and 26% YoY growth rates respectively. As far as the animal health business id concerned, the poultry business continued to contribute significantly to the total animal health business. During the year, the company incurred VRS to the tune of Rs 135 m.

    2003:  This year was full of disappointments for the company. Revenues registered a 13% YoY decline, which was largely led by the dip in pharmaceutical business (down 16% YoY), while animal health care business reported a decline of 8%. The slowdown of the market in general and lower growth rates in the therapeutic segments in which the company operates, contributed to the fall in the topline. Operating margins dipped from 12% to 7% aided by pressure on realisations as prices of its key products fell.

    Consequently, bottomline fell 64% YoY. The company had received extraordinary income to the tune of Rs 331 m during 2002 for the sale of certain trademark licenses, which deflated the bottomline picture in 2003. Also, it incurred VRS expenditure to the tune of Rs 167 m. It must be noted that during the year, the domestic pharma industry was hampered by price cuts and Pfizer was one of the major losers on this front. The company's product portfolio is old and the management did not make any significant product launches citing India's patent laws.

    2004:  During the year, the company merged with Pharmacia Healthcare. Topline clocked an 18% YoY growth aided by the 8% YoY growth in the clinical services development business and 17% YoY growth in the pharmaceutical business. Animal health care business registered a decent 9% YoY growth. The operating margins improved from 7% to 12% on the back of operational efficiency led by lower staff cost and lower proportion of traded goods in the company's sales. Good topline growth and benefits for the company at the operational level was reflected in the bottomline which surged 66% YoY. It must be mentioned that the performance of the company was pretty decent considering the fact that most of its products are old and competition is higher.

    What to expect?
    At 738, the stock is trading at a P/E of 41 times its annualised 1QFY05 earnings. The company's portfolio comprises of old products, which have been facing intense competition and price cuts. Also, in the past the company was not keen on introducing new products due to India's patent laws, which recognised process patents and not product patents. However, post 2005, the scenario has changed with India accepting the WTO norms. Therefore, Pfizer is in a position to capitalise on this opportunity as it can now introduce new products in the Indian market from its parent's product stable. Also, the merger with Pharmacia is expected to bring in operational synergies, which will continue to reflect in margin expansion going forward.

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