Knoll Pharmaceuticals is the Indian subsidiary of Knoll AG, which in turn is part of the health and nutrition division of BASF AG. Knoll is a leading player in the Indian insulin, pain control and antacid market with brands such as Brufen (anti–rheumatic), Digene (antacid), Epilex (anti–epilepsy) and Cremmafin (laxative).
Over the last two years the company has been restructuring its Indian operations. It has shut down its Sion plant, paid off its workers (via a VRS) and consolidated operations at its Jejuri plant (in Maharashtra) and its Goa plant.
The company is a leader in the anti–diabetes segment with a market share of more than 70%. (Hoechst Marion Roussel is the company’s closest competitor in this segment.) The company’s insulin business contributes around 40% of the company’s turnover. The incidence of diabetes in India is very high. However, given the low income levels, the percentage of untreated diabetic patients in India is very high. And as more and more patients come under the umbrella of diabetes treatment, the insulin market should see a healthy growth.
However, the company’s other products Brufen and Digene have registered volume declines over the last two years. With the cut in the ibuprofen prices by the National Pharmaceutical Pricing Authority (NPPA), profits from Brufen are bound to remain depressed in the coming year. In order to buck the overall slowdown in the industry as well as the Drug Price Control Order (almost 60% of the company’s products come under the DPCO), the company has introduced new products such as Novolet (a pre–filled insulin delivery device) ‘Nuclav Duo’ range of formulations (to treat respiratory tract infections) Epilex 500 and Epicom (both extensions of the company’s epilepsy portfolio) and ‘Thyronorm’ (to counter a disorder of the thyroid function).
The company also renegotiated the deal for the sale of its Sion premises during last year. (This was because after paying an advance of Rs 254.5 m for the plot, the buyer, Neo–Pharma expressed its inability to proceed with the transaction. The plot was split into two and one part was given to Neo–Pharma with Knoll allowed to sell the second plot to a new buyer.) If the deal for the second part of the plot were to go through in the current year too, this would further strengthen the company’s balance sheet.
As it is, Knoll’s cash and marketable investments amount to almost Rs 87 per share i.e. almost 24% of the stock price of Rs 358 per share (52 week range: 658/309). Last year the company generated cash from operations amounting to Rs 706 m, almost 35% higher than the previous year. As a matter of policy the company invests its entire cash generation in bond funds with a growth option. (It did the same last year). As a result the accrued income shows up as an appreciation in the repurchase price of the fund and does not appear in Knoll’s profit and loss statement unless the fund is sold.
Even in the past, the company has used the cash at its disposal quite sensibly. (It gave a dividend of Rs 40 per share last year). It can be expected to do so in the future also. If one were to adjust for the extraordinary income (which accrued from the sale of the property at Sion) the stock quotes at an earning multiple of 18 times.
Perhaps, the only grey area is the apprehension (which is common to all MNC pharmaceutical companies) that the parent may in the future introduce new products only through a 100% subsidiary.
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