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Pfizer: Gearing up - Views on News from Equitymaster
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  • Jul 4, 2002

    Pfizer: Gearing up

    Pfizer has reported a marginal rise in net sales (excluding excise) for 1HFY03 ahead of its merger with Parke Davis. This seems mainly on the back of discontinuance of certain non-profitable brands ahead of the merger. The merger ratio has been finalised at 4:9 (i.e. 4 shares of Pfizer for every 9 shares of Parke Davis). Post the merger, Pfizer is expected to be the fifth largest player in the domestic pharma market.

    (Rs m) 1HFY02 1HFY03* % Change
    Sales 1,516 1,532 1.0%
    Other Income 281 323 14.6%
    Expenditure 1,406 1,388 -1.3%
    Operating Profit (EBDIT) 110 144 30.9%
    Operating Profit Margin (%) 7.3% 9.4%
    Interest 2 1 -42.1%
    Depreciation 34 38 11.9%
    Profit before Tax 356 428 20.2%
    Tax 142 157 10.6%
    Profit after Tax/(Loss) 214 270 26.7%
    Net profit margin (%) 14.1% 17.7%  
    No. of Shares (eoy) (m) 23.4 23.4  
    Diluted Earnings per share 18.2 23.1  
    P/E (at current price)   19.6  

    *- 1HFY03- is for the half year ending May'02.

    The company reported a strong 210 basis points rise in operating margins. However, operating margins of the company are still lagging behind its peers. A closer look at the break-up of operating expenses suggest that there could be further improvement in operating margins going forward. While most of the cost heads have reported an improvement, staff costs recorded a rise on the back of integration of the field force of Parke Davis. The integration of the marketing staff of Parke Davis with Pfizer has already taken place.

    1HFY02 Sales
    (Rs m)
    Pharma 1,620 4.6% 19.0%
    Animal Healthcare Business 322 8.9% 15.1%
    Services- Clinical Development 56 3.7% 6.4%
    *- Profit before interest and tax
    % of sales 1HFY02 1HFY03
    Raw Materials 25.2% 21.5%
    Purchase of finished goods 9.7% 9.1%
    Staff Costs 16.8% 18.0%
    Administrative and other costs 40.9% 42.8%

    The boost in sales and operating margins seem to be on the back two main reasons. One, the company's 'Corex' range of cough preparations which contribute around 30% to Pfizer's sales are logging 8%-9% growth rates. Further, inspite of strong competition, new products like Magnex and Hepashield are selling at a premium.The merger with Parke Davis is expected to bring down the DPCO coverage of the company to around 19% of turnover against 24% at present. The government is yet to announce the final list of drugs under the new DPCO policy formulated early this year. Becousules (vitamin brand), which would contribute around 12% of the merged entity, is expected to come out of DPCO coverage. Becousules, a Rs 700 m product of Pfizer, is a very strong brand in the vitamin segment. Therefore, the company might be able to implement some price increase on the product.

    More on the merger

    At the current market price of Rs 454, the stock is trading at 16x our FY03 expected earnings on a consolidated basis. The company has set a target of logging double digit growth in topline and 20-25% growth in bottomline. This is on the back of greater focus on profitable brands and integration benefits. The final DPCO list may also act as a trigger for the company's stock price.

    Comparative Valuations
    Particulars CMP
    03 E
    Mkt. Cap
    (Rs m)
    /sales (x)
    Aventis Pharma 380 11.3 8,510 1.3
    GSK India 372 18.8 27,814 2.4
    Pfizer Ltd 454 16 13,865 2.4



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