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Abbott India: DPCO blues - Views on News from Equitymaster
 
 
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  • Jul 22, 2003

    Abbott India: DPCO blues

    Following the worldwide sale of BASF AG’s (Knoll’s parent company) pharmaceutical business to Abbot Laboratories in Dec ’00, Knoll Pharma had become a subsidiary of BASF AG. Consequently, Knoll Pharma was renamed as Abbott India Ltd (AIL) with effect from July ’02. Abbot Laboratories is a global healthcare company devoted to discovery, development, manufacture and marketing of pharmaceuticals, nutritional and medical products including devices and diagnostics. The merger is expected to increase the company’s market share and open up new opportunities for higher growth and greater profitability. In this context, let us briefly understand the business of AIL.

    AIL is the leading player in the domestic insulin, anti-diabetic, pain control and antacid markets. The company’s major brands are Digene, Clivarine, Aciguard, Epilex, Brufen and Bruzen MR. AIL operates in both acute and lifestyle therapies. In the acute segments like gastroenterology and pain management, the company has witnessed volume pressure. However, in the lifestyle segments of diabetes, Central Nervous System (CNS) and Urology, AIL has registered strong growth. New product introduction has also been one of the key growth drivers for the company. During the year ended Nov’02, AIL launched Ganaton (gastro motility disorders), Celax range of once a day formulations, a premium anti-biotic for respiratory tract infections and Hytrin-used in the treatment of Benign Prostatic Hyperplasia (BPH). AIL has also commenced the marketing of various products imported from its parent.

    Financial overview
      Dec-00 Nov-01* Nov-02
    Revenues (Rs m) 3,156.0 3,370.9 3,399.0
    Growth in revenues - 6.8% 0.8%
    PAT (Rs m) 715.0 534.5 558.0
    Growth in PAT - -25.2% 4.4%
    OPM (%) 15.0 17.0 22.3
    NPM (%) 22.7 15.9 16.4
    * Annualised

    On the financial front, over the past few years, APL has witnessed modest growth due to intense competition, low priced generics and proliferation of spurious products. For the year ended Nov ’02, although AIL had recorded only a marginal increase in revenues, bottomline registered a 4% rise. This was primarily due to the fact that that the benefits of the extensive restructuring exercise undertaken by the company have started to accrue. In Nov-02, AIL disposed off its Jejuri undertaking. The plant had ceased to enjoy tax benefits and had also seen a drop in the capacity utilization on account of a decline in the volumes of Brufen and Digene. Such measures are likely to further improve the operating margins of the company going forward.

    Absence of product patents has resulted in AIL showing reluctance in aggressively launching new products from its parents portfolio. This has stunted the growth of the company to some extent. Moreover, a major portion of the company’s products is under DPCO cover. Rigorous price controls employed by the government have further affected the growth prospects of the company. Recently, National Pharmaceuticals Pricing Authority (NPPA) reduced the prices of three products. This is likely to affect the performance of the company in the near term.

    NPPA effect
    Formulation/Composition Name Pack Size Existing Price (Rs.) Revised Price (Rs.) Change (%)
    Erykid-125 DIS Tablet 10's Blister 18.0 15.1 (16.3)
    Erythromycin Ethyl Succinate Tablet 6's Al_St 45.3 35.8 (21.1)
    Erythromycin Ethyl Succinate Tablet 6's Al_Bl 45.0 35.5 (21.2)

    However, with India being a signatory of WTO resolution on TRIPS, product patents will be introduced in 2005. The protection provided to patented products will encourage MNCs like AIL to make more aggressive launch from its parent’s product portfolio and thus improve the performance of the company in the long term.

    Comparative Valuation
      Abbot (India) Aventis Pfizer GSK Pharma
    Current Price (Rs) 284 358 411 365
    EPS (Rs) 34.5 26.5 26.4 17.2
    P/E (x) 8.2 13.5 15.6 21.2
    OPM (%) 15.0 15.8 11.7 16.7
    M Cap/Sales (x) 0.7 1.3 1.8 2.5
    *All valuations pertain latest declared annual results

    AIL is currently trading at a P/E of 6.7x its 1HFY04 earnings. The company has a low Market cap / Sales ratio as compared to its peers implying relatively weaker brand equity. Moreover, a high DPCO cover and competition led drop in human insulins prices could affect the performance of the company in the near term. However, for the long term, post 2005, with the introduction of product patents, aggressive product launches from parent’s product portfolio and dilution of DPCO cover could help the company improve its performance.

     

     

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