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Pharma: Quarter under review - Views on News from Equitymaster
 
 
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  • Aug 19, 2003

    Pharma: Quarter under review

    After a lackluster performance in March quarter pharma companies made a remarkable turnaround in the June quarter. While the domestic pharma companies recorded strong revenue growth on the back of a revival in the anti-infectives segment, the MNC pharma companies managed to successfully control costs resulting in higher margins. In this context, let us briefly understand the performance of the industry as a whole during the June quarter.

    Domestic pharma companies
    (Rs m) June Q'02 June Q'03 Change
    Net sales 19,027 21,879 15.0%
    Operating profits 4,227 4,877 15.4%
    Operating profits margin (%) 22.2 22.3  
    Profit before tax 4,276 5,516 29.0%
    Profit after tax 3,411 4,476 31.2%
    Net profit margin (%) 17.9 20.5  
    P/E (annualised) (x)   17.9  

    The above figures are the aggregate of the quarterly results of five major domestic pharma companies – Ranbaxy, Cipla, Dr Reddy’s Laboratories, Nicholas Piramal and Wockhardt. As can be seen, the domestic pharma companies recorded 15% increase in the topline. This was possible due to higher off-takes in the domestic markets in the current quarter on account of postponement of VAT. Moreover, improvement in the product mix (Dr Reddy’s), sharp rise in the export of formulations (Wockhardt and Cipla) and consolidation (Nicholas Piramal) also contributed to the increase in the topline. While the domestic pharma companies were able to sustain the operating profit margins, a drop in the interest expenditure helped the companies in registering a sharp rise at the net level. The restructuring of the debt portfolio in favour of low cost ECBs (Ranbaxy and Nicholas Piramal) has helped the companies record a sharp 56% drop in the interest costs during the June quarter as compared to the corresponding previous quarter.

    The domestic pharma companies are trading at a P/E of 17.9x their annualised June Q’03 earnings. Going forward, increased R&D thrust, export focus, US government policy of encouragement of generics and inorganic growth strategy adopted by the companies indicate good prospects for the domestic pharma companies going forward. However, the inherent risk associated with new drug research, high legal expenses incurred in challenging existing patents, uncertainty in respect of DPCO and the market dynamics post 2005 remain a cause of concern.

    MNC pharma companies
    (Rs m) June Q'02 June Q'03 Change
    Net sales 5,612 6,096 8.6%
    Operating profits 1,093 1,282 17.3%
    Operating profits margin (%) 19.5 21.0  
    Profit before tax 1,138 1,414 24%
    Profit after tax 743 1,057 42.3%
    Net profit margin (%) 13.2 17.3  
    P/E (annualised) (x)   11.4  

    The above figures are the aggregate of the quarterly results of three major MNC pharma companies – GSK Pharma, Aventis and Novartis. Various strategies adopted by the MNC pharma companies like revitalization of the mature product portfolio by introducing product extensions and variants (Novartis), focus on power brands (GSK Pharma) and aggressive new product launches (Aventis) has resulted in a improvement in the topline. Further various measures taken like higher exports and closure of unviable units has helped the MNC pharma companies record an improvement in the operating profit margins.

    The MNC pharma companies are trading at a P/E of 11.4x annualised June Q’03 earnings. The MNC pharma companies are expected to gain immensely post 2005 on the back of their parent’s strong product portfolio. However, their high exposure to DPCO and a focus on the domestic markets remain the key causes for concern.

    Consolidated (Domestic + MNCs)
    (Rs m) June Q'02 June Q'03 Change
    Net sales 24,639 27,975 13.5%
    Operating profits 5,320 6,159 15.8%
    Operating profits margin (%) 21.6 22.0  
    Profit before tax 5,414 6,930 28%
    Profit after tax 4,154 5,533 33%
    Net profit margin (%) 16.9 19.8  
    P/E (annualised) (x)   16.6  

    On a consolidated basis, the pharma group (domestic plus MNCs) is trading at a P/E of 16.6x annualised June Q’03 earnings. Though the pharma industry has recorded strong growth in the current quarter, an across the sector rise in valuations especially in the mid-cap stocks does not appear to be fundamentally driven. In our view, though the pharma industry has good prospects in the long run, management vision of a company is key to its success. Only a company with a good business model will be able to stand up to the challenges that lie post 2005 period and grab opportunities for growth.

     

     

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