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Pfizer: Banking on margins - Views on News from Equitymaster
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Pfizer: Banking on margins
Jul 3, 2008

Performance summary
  • Sales decline by 1% YoY during 2QCY08 due to poor performance of the pharma and clinical services businesses and due to the sale of 4 consumer health brands.
  • Operating margins expand by 1.2% during the quarter due to a substantial fall in purchase of traded goods (as percentage of sales).

  • While the bottomline during 2QCY08 witnesses a considerable decline of 85% YoY, if one excludes the extraordinary income in 2QCY07, then the bottomline grows by a respectable 18% YoY.

Financial performance: A snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 1,647 1,634 -0.7% 3,197 3,138 -1.8%
Expenditure 1,295 1,265 -2.3% 2,471 2,431 -1.6%
Operating profit (EBIDTA) 352 369 4.8% 726 707 -2.6%
Operating profit margin (%) 21.4% 22.6%   22.7% 22.5%  
Other income 174 251 44.6% 294 432 47.3%
Depreciation 30 24 -18.4% 57 47 -17.9%
Profit before tax 496 596 20.1% 963 1,093 13.5%
Exceptional items (expense) 2,711 (6)   2,685 2,093 -22.0%
Tax 629 210 -66.6% 787 878 11.5%
Profit after tax 2,578 379 -85.3% 2,860 2,308 -19.3%
Net profit margin (%) 156.5% 23.2%   89.5% 73.6%  
Net profit margin (excl. extraordinary items) 19.8% 23.6%   19.9% 18.3%  
No. of shares (m)       29.8 29.8  
Diluted earnings per share (Rs)**         41.4  
P/E ratio (x)*         13.3  
(*On a trailing 12-month basis) (**Excluding extraordinary item and tax thereon)

What has driven performance in 2QCY08?
  • During 2QCY08, Pfizer’s topline declined by 1%. This was largely due to the 2% YoY decline in sales reported by the company’s pharma business. Further, Pfizer’s sales were also affected as the company had sold four brands from its consumer healthcare division namely ‘Benadryl’, ‘Caladryl’, ‘Benylin’ and ‘Listerine’ to Johnson & Johnson. These four products accounted for 10% of Pfizer’s total sales. Having said that, the company’s top brands namely ‘Corex’ and ‘Becosules’ performed well and now command a market share of 14% and 21% respectively in their respective therapeutic areas. Revenues from the consumer health business, which Pfizer has retained with itself, posted a decent 17% YoY growth. The company made three product launches during the first half of the year out of which the smoking cessation drug ‘Champix’ generated revenues to the tune of Rs 10 m.

    Segmental performance
    (Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
    Pharmaceuticals (incl. services) 1,468 1,436 -2.1% 2,851 2,740 -3.9%
    PBIT margin (%) 29.4% 32.9%   29.5% 31.1%  
    Animal health (incl. services) 180 199 10.3% 349 399 14.5%
    PBIT margin (%) 18.5% 28.5%   18.2% 24.9%  
    Services - Clinical            
    Development Operations 58 54 -5.7% 110 106 -3.8%
    PBIT margin (%) 13.2% 1.3%   11.9% 15.2%  
    Total revenues 1,705 1,689 -0.9% 3,309 3,245 -1.9%
    Total PBIT margin (%) 27.7% 31.3%   27.8% 29.8%  

  • Pfizer’s operating margins improved by 1.2% during 2QCY08, which was largely due to the fall in purchase of traded goods (as percentage of sales). An improvement in the product mix also contributed to the overall expansion in margins. It must be noted that the company imports bulk of its key raw material requirements from China and since the companies there have undertaken price increases, the same has resulted in a rise in raw material costs during the quarter. The company does not expect this scenario to ease in the coming two quarters and hence margins are likely to come under pressure.

  • Pfizer’s bottomline plunged by 85% YoY during the quarter. However, the company had received extraordinary income to the tune of Rs 2.7 bn in 2QCY07 on the sale of its Chandigarh property. Excluding the impact of this extraordinary item and tax thereon, the bottomline grew by a respectable 18% YoY due to improvement in operating margins, higher other income and lower depreciation charges. For 1HCY08, extraordinary income includes the consideration that the company received on the sale of the four consumer health brands.

What to expect?
At the current price of Rs 551, the stock is trading at a price to earnings multiple of 11.7 times our estimated CY09 earnings. Despite near term pressures, we expect Pfizer’s operating margins to improve going forward backed by an improvement in product mix and continued efficiency at the operating level. The company already launched three blockbuster drugs from its parent’s product portfolio in the Indian markets in CY07 and has unveiled plans of launching around three more products going forward as well. Out of these, the smoking cessation drug ‘Champix’ has been launched and has already amassed revenues of Rs 10 m. Two more new products are slated to be launched during the year; one in the anti-infectives space and the other catering to the cardiovascular therapeutic area.

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