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MNC pharma valuations: Strong as ever - Views on News from Equitymaster
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  • Jun 19, 2000

    MNC pharma valuations: Strong as ever

    The multinational pharmaceutical stocks have shown interesting trends over the last six months. While there have been apprehensions regarding both topline and bottomline growth the fact remains that almost all these stocks are quoting at earning multiples of over 30.

      Pfizer Glaxo SmithKline Hoechst Novartis
    3 year Sales growth 34.7% 12.2% 0.12% 11.2% 10.7%
    3 year earnings growth 44.8% 8.0% -26.5% 10.6% 75.6%
    ROE (FY2000E) 32% 17.8% 8.0% 18.5% 31.1%
    P/E (FY2000) 28.2 34.0 33.4 39.2 26.0
    Mcap/Sales 2.9 2.4 1.6 2.0 3.3

    Pfizer, which recently went ex bonus is expected to continue to show a return on equity of over 30% (the highest among the MNC pharma stocks) even in the current year. Six brands viz. Becousules, Corex, Protinex, Dolonex, Terramycin and Minipress XL account for 80% of the company’s sales. In the first quarter of the current year, the company has consolidated its hold on the cough market with a growth of over 12% for Corex when the overall market has stagnated. However, the company enjoys a relatively lower multiple than Glaxo primarily due to the presence of a 100% subsidiary.

    Hoechst Marion Roussel, which showed impressive results in the current year is quoted at the highest multiples. This is because the new products that the company has introduced over the past year such as Cardace (cardiovascular), Amaryl (an oral anti–diabetic) Frisium (anti–epileptic) and Cefrom (antibiotic) are doing reasonably well. The company has improved efficiencies over the last three years by selling of its Mulund and Thane plants and consolidating its bulk drugs and formulation manufacturing at Ankleshwar and Goa respectively. With the lucrative Russian exports picking up in the current year, the company can be expected to do well in the current year.

    Glaxo has restructured its organisational set up by forming seven business units based on therapeutic segments. It also plans to sell of its tail end brands and consolidate in the dermatological, gastro intestinals and antibiotics segments. The company has almost Rs 550 m worth of cash and investments, which it can use for acquisitions of brands in the foreseeable future. However, organic growth in the current year can be expected to hover around 11%. Overall only 5 products viz. the Betnovate range, Zinetac, Corbadex, Betnesol and Becadexamin capsules showed a decent growth last year and this year the company would have to continue depending on these in the current year too. Even last year, through Glaxo’s premier anti–ulcer product Zinetac saw a 27.7% growth overall, the company had to drop its prices by 33%.

    SmithKline Pharma is undergoing a tough year with Engerix and Iodex facing tough competition and Zevit being brought under DPCO. With new products such as the anti–meningitis vaccine and Avandia (anti–diabetes) likely to be introduced through the 100% subsidiary, topline growth prospects continue to remain a problem.

    Novartis is to spin off its agrochemical business, which should not only improve return ratios but also smoothen quarterly performance. At present, the agrochemical business has been struggling and this has pulled down the company’s margins. The market however has responded to the announcement of the hive off quite positively pushing the stock almost 40% over the last month.

    Overall, Hoechst, Novartis and Pfizer should be able to show better numbers in the current year. If Glaxo is successful in any acquisition its bottomline should also get a boost.



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