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Aventis: Geared for the patent regime

Jun 17, 2005

With the advent of the patent regime in India, MNC pharma companies stand to gain a lot in terms of new product launches and consequently increased revenues. Being an MNC, Aventis is all set to exploit this opportunity. In this article, we take a look at how the company has performed over the years and what lies ahead.Company profile
Aventis Pharma - the 50% subsidiary of Aventis SA, France, is the 2nd largest pharma MNC in India with a turnover of over Rs 7.4 bn (CY04). It is the 8th largest domestic player with a market share of 2.9%. Aventis has relatively few but very strong brands in the country. The company's key brands include Clexane, Targocid, Amaryl, Frisium and Cardace and the top 10 brands accounted for 76% of domestic sales in 2004. Domestic sales constituted 74% of total sales in 2004 and exports constituted the remaining 26%. Over the years, it has progressively transformed itself into a company catering to the chronic (diabetes, cardio vascular) and critical-care therapeutic segments. Apart from catering to the Indian markets, the company supplies bulk drugs to its parent. Recently, the parent merged with another France based pharma company, Sanofi, thus making it part of one of the largest pharma conglomerates in the world.

Numbers at a glance...
CY02CY03CY041QCY05
Net sales growth (%)12.7%5.8%12.8%3.8%
Operating profit margin (%)15.8%21.4%29.2%22.7%
Operating profit growth (%)-1.5%43.7%53.5%-1.7%
PBT margin (%)14.6%21.2%29.9%24.4%
Net profit margin (%)9.9%15.1%20.2%13.6%
Net profit growth (%)-8.4%61.4%50.6%-26.3%

The journey over the years
CY02: Topline registered a 13% YoY growth backed by a strong 27% YoY growth in exports and a 9% YoY growth in domestic sales. As far as exports are concerned, Russia (24%) and the CIS markets contributed significantly to Aventis' exports growth. As regards the domestic product portfolio, the top 10 brands accounted for 72% of domestic sales and clocked a 16% YoY growth. Growth was led by Clexane (44% YoY), Amaryl (41% YoY), Targocid (34% YoY) and Cardace (32% YoY). However, operating margins declined from 18% to 16% chiefly on account of a 16% YoY rise in expenditure.

It must be noted that during the year the company invested heavily in new medical and marketing activities to support and sustain the high growth achieved in strategic brands. Also, there was an 18% increase in raw material costs brought about by imposition of customs duties on Clexane and Cefrom consequently affecting margins. Reduction in the operating profits coupled with a fall in the other income component contributed to the 8% decline in bottomline.

CY03: Revenues grew by 6% YoY aided by the 7.5% YoY growth in domestic sales. This year, however, the company was not able to mirror the robust export growth witnessed in 2002. Exchange variance partly affected exports, which recorded only a marginal growth. Despite this, the operating margins registered an impressive 560 basis points increase to over 21% due to a combination of factors such as a better product mix, efficiencies in procurement of raw materials and reduced promotional expenditure. The bottomline, however, registered a much sharper YoY growth of 61% owing to a spurt in other income and extraordinary items. The company had received discounts from suppliers, which contributed to the rise in extraordinary income. On the new products front, the company made 2 new launches - 'Lantus' which is the world's first and only once a day insulin and 'Actonel', which is for the treatment of osteoporosis.

CY04: The year 2004 saw the merger of Aventis SA, France, with Sanofi-Synthelabo to form the entity Sanofi-Aventis. In 2004, revenues clocked a robust 13% YoY growth with the domestic sales recording a 7% YoY growth. However, after the dull performance of the previous year, exports staged a recovery and jumped 31% YoY and was again mainly driven by the CIS countries (31% YoY) and sourcing (41% YoY). Thus, strong exports growth coupled with some decrease in input costs aided the rise in operating margins by 780 basis points. All of this percolated to the bottomline, which registered a 51% YoY growth in 2004.

What to expect?
At 1,300, the stock is trading at a P/E multiple of 31.7 times its annualised 1QCY05 earnings. Apart from the domestic market, which seems to be doing pretty well, Aventis has an opportunity to scale up the contribution from exports in the future i.e. outsourcing to the parent. In fact, Aventis is the only major MNC pharma company, which has a clear-cut strategy on outsourcing. The company's exports as a percentage of sales have grown significantly (from 15% in CY00 to 26% in CY04) and are likely to go up further, as the company is investing in capacities to capitalize on this opportunity. Also, the company is aggressive as far as launching new products are concerned and will therefore be a major beneficiary in the patent regime when a slew of new products will be unveiled for the Indian markets. The company has also undertaken several brand awareness initiatives over the years, which will augur well for the company in terms of increased visibility for their products.

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