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Aventis: MNC with a difference

Jul 3, 2003

MNC pharma companies have over the years steadily lost market share to their domestic counterparts. From a market share (in value terms) of almost 90% in the 70s, MNC pharma companies now barely account for 20% of domestic pharma sales. Absences of product patents and a consequent reluctance in launching new products coupled with rigid price controls have been limiting growth prospects. However, Aventis Pharma (APL) has adopted a strategy to beat this trend. APL has an aggressive product introduction strategy, which has seen it launch most of its parentís patented products and build brand image and thus command market leadership. Following the global merger of Hoechst Marion Roussel with Rhone-Poulenc, APL was formed in 2001. It is the 2nd largest pharma MNC and 6th largest domestic player with a market share of 2.9%. Apart from the traditional therapeutic segments like anti-infectives, vaccine and anti-histamines, APL has presence in the high value lifestyle segments like cardiology, anti-diabetics and oncology. The major products in the companyís portfolio are Cardace (cardiovascular), Allegra (anti-histamine), Clexane (anti-thrombotics), Daonil and Amaryl (oral hypoglycemic agent) and Arava (rheumatoid arthritis).

Revenue break up (%)
1999 2000 2001 2002
Domestic 86 85 81 79
Exports 14 15 19 21

Like most MNCs, domestic market is the key focus area for APL. However, the company also acts as an outsourcing base for its parent and hence derives a quarter of its revenues from exports. The increase in exports was triggered mainly by a 24% and 29% growth in exports to Russia and Ukraine respectively. Russia and Ukraine contribute over 80% of the total exports of the company. However, due to the global decline in the demand for Daonil, exports could be affected in the near term.

On the domestic front, APL has identified 7 key segments (anti-infectives, metabolism, cardiology, respiratory, CNS, bone/joint and oncology) and 30 brands for growth. In 6 out of these 7 segments, APL is the market leader. Out of the 30 brands identified by the company, 12 are under DPCO. In terms of revenues, 38% in FY03 (down from 50%) is under DPCO cover, which is a positive.

Growth in strategic brands
Brand Segment Sales growth (%) Strategy adopted to sustain growth
Clexane Anti-thrombotics 44 Market research campaign launched
Amaryl Anti-diabetes 41 Patient acquisition campaign launched
Targocid Anti-infectives 34 New Clinical study initiated
Cardace Cardiovascular 32 National campaign with standard packages
using recommended dosage launched
Allegra Anti-histamine 15 -
Taxotere Oncology 17 Conference organised in major cities
Rabipur Anti-rabies 13 Program initiated to increase
awareness among doctors
Tavanic Anti-infectives (13) Investments scaled down
Source: 2002 Annual report

APL has registered strong growth in most of its strategic brands despite increased competition and entry of copycats. APLís strategy of increasing brand awareness among doctors and patients has helped it command premium prices for its product despite higher competition. APL plans to continue with its strategy of aggressive product launches from its parentís product pipeline. In the current year, APL plans to launch two new products Lantus and Actonel, which will fuel growth. Continuation in new product introductions reflects the commitment of the parent major.

Financial overview
2001 2002
Revenues (Rs m) 5,462 6,157
PAT (Rs m) 666 611
OPM (%) 18.1 15.8
NPM (%) 12.2 9.9
Advertisement expense (% of revenues) 3.9 3.6

On the financial front, though APL has registered a steady topline growth, profit margins were affected due to the imposition of customs duty on key brands like Clexane, which were fully absorbed by the company. Going forward, higher investments made in brand building and efforts to increase the life cycle of existing products are likely to translate into better margins in the future. However, the costs involved in aggressive product launches will continue to exert pressure on APLís margins.

Comparative Valuation
Aventis Pfizer GSK Pharma
Current Price (Rs) 369 405 390
EPS (Rs) 26.5 26.4 17.2
P/E (x) 13.9 15.4 22.7
OPM (%) 15.8 11.7 16.7
M Cap/Sales (x) 1.4 1.8 2.7
*All valuations pertain latest declared annual results

APL is currently trading at a P/E of 11.2x its 1QFY04 earnings. As can be seen from the table above, valuations seem to be on the lower side compared to other MNC peers. Historically, the stock has traded at a discount due to some Indian promoter related issues. Considering the relatively new product portfolio, high exposure in the lifestyle segments and strong parent product pipeline, the long-term prospects of the company are bright. Strong parental support and quick launch of new products is what differentiates APL from other MNCs and this is what makes the company attractive.

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