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MNC Pharma: Where is it headed?

Jun 12, 2007

In terms of both the financial performance and the stock price movement, the MNC pharma companies, as compared to their domestic counterparts, seem to have gone on the backfoot. In this article, we shall analyse the reason for the same and what the future holds for these companies going forward. For the purpose of this article, the focus is on the four MNC companies under our research coverage namely, GSK Pharma, Aventis, Pfizer and Novartis. Financial performance: MNC pharma companies are largely focused on the domestic market as opposed to their domestic peers, whose increasing focus on the exports markets have helped them augment their overall performance. Having said that, even in the domestic market, MNC companies have not really been able to outperform the domestic companies. For instance, on an average, while the domestic companies under our coverage have grown their topline by around 12% to 16% in FY07/CY06, MNC companies have been able to clock topline growth in the range of only 9% to 10%. Various factors contributing to the lower growth have been increasing competition, low number of new product launches, trade related issues, divestment of certain businesses and the like.

Event specific influence: Specific events have also impacted the financial or the stock performance of these MNC pharma companies. To put things into perspective, GSK Pharma divested its animal healthcare business to Virbac to focus on its core business of pharmaceuticals, resulting in a decline in overall revenues both in CY06 and 1QCY07. Similarly, with Pfizer Inc., USA divesting its global consumer healthcare division to Johnson & Johnson, Pfizer India's consumer healthcare business (accounting for 22% of total revenues) is also expected to be spun off in the near future. In the case of Novartis, the rejection of a patent for its anti-cancer drug 'Glivec' in India and the company's subsequent challenge of the same has also probably dampened the movement in the company's stock price.

Product launch status: New product launches from the parent's product stable will be critical for MNC pharma companies going forward, as this is one factor that gives then an edge over their domestic counterparts. Besides this, MNC majors are looking at in-licensing products from other global companies given their strong reach in the domestic market. That said, barring Pfizer, which introduced 3 products at the start of CY06, some of the other MNC companies have not yet made any significant launch. Launch of patented products in the country are unlikely to take place before late CY07 or CY08. Meanwhile, it is the existing products of the companies are driving the current growth in the revenues.

Summing it up...
MNC pharma stocks have been accorded higher valuations in comparison to domestic companies, as the former can rely on their parent's strong research pipeline to launch products in the country and also due to the fact that their revenue streams tend to be relatively more stable. Going forward, while the product patent law in India will mean that MNC companies will be more forthcoming in launching patented products into the country, the prices of these products will most likely be subject to price negotiation as the government looks to make medicines more affordable to the common man.

We believe that despite challenges, the way forward for MNC companies is to keep up the pace of the product launches (either through the parent's folio or through the in-licensing route) and shore up their performance if they want to retain that 'edge' both in the Indian pharma industry and the investor's mind.


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