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Abbott: What lies ahead? - Views on News from Equitymaster
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  • Aug 24, 2005

    Abbott: What lies ahead?

    With the advent of the product patent law in India, Indian arms of MNC pharma companies will be in the limelight, as they will look to launch patented products from their parents' folio.Being an MNC pharma company, Abbott also stands to gain from the same. In this article, we take a look at the company's past performance and what lies for it in the future.

    Company background
    Abbott India is a 38% subsidiary of Abbott Laboratories Inc., US. Abbot Laboratories (a global healthcare company with focus on pharmaceuticals, nutritional and medical products including devices and diagnostics) is the world's 11th largest pharma companies. Abbott India focuses on core therapeutic areas in pharmaceuticals, namely urology, gastroenterology, pain management, benign prostatic hyperplasia and specialized anesthesia range, with well-known brands like Brufen, Digene, Cremaffin, Hytrin and Norvir. In India, Abbott is principally a trading company and most of its products are either imported from its parent or outsourced to other manufacturers in India.

    A look at the numbers
    (Rs m) FY02 FY03 FY04 FY05 1HFY06 CAGR**
    Net sales 3,094 3,550 3,731 4,051 2,035 9.4%
    Expenditure 2,568 2,811 2,910 3,153 1,683 7.1%
    Operating profit (EBIDTA) 526 739 821 898 352 19.5%
    Operating profit margin (%) 17.0% 20.8% 22.0% 22.2% 17.3%  
    Profit after tax 490 578 673 1,022 277 27.8%
    Net profit margin (%) 0 16.3% 18.0% 25.2% 13.6%  
    No. of shares (m) 14.3 15.3 15.3 15.3 15.3  
    Diluted earnings per share (Rs)* 34.3 37.8 44.0 66.8 36.2  
    P/E ratio (x)         18.5  
    (* annualised)            
    ** FY02 to FY05

    Going back in time
    Revenue story: Abbott has witnessed a 9% CAGR in revenues in the past 4 years, which is more or less in line with its peers such as Glaxo and Aventis, which have clocked around 10% CAGR in revenues in the same period. In FY03, especially, revenues registered a marginal 5% YoY growth on the back of market forced reduction in the prices of human insulin and reduction in purchases owing to VAT uncertainties. In 1HFY06 too, the company was plagued with VAT related issues, resulting in a mere 4% YoY revenue growth. In the other years, however, the company has managed to beat the industry growth rates.

    Segment focus: The core therapeutic segments identified by Abbott India are urology, CNS, diabetes, gastro, pain management and specialized anesthesia range. Abbott India has a significant exposure in the lifestyle segment. With lifestyle diseases on the rise, the company is expected to capitalize on this opportunity going forward. However, the acute therapy areas such as gastroenterology and pain management (price control on ‘ibuprofen') have continued to remain under pressure.

    Flat margins: Over the years, Abbott has undertaken cost containment measures to improve the operational efficiency. This has been reflected in its operating margins, which have shown some improvement. However, while the margin expansion was considerable in FY03, they have remained more or less flat in the subsequent years. In 1HFY06, margins were under pressure due to the levy of excise duty on the basis of MRP. Considerable increase in purchase of goods and decrease in raw material consumption has suggested that the company has increased the outsourcing of its products to other manufacturers. Other expenditure as a percentage of sales has, however, been on a declining trend.

    Cost break-up
    (% of sales) FY02 FY03 FY04 FY05 1HFY06
    Raw materials consumed 15.3% 12.9% 9.2% 3.7% -3.7%
    Purchase of FG 45.1% 44.2% 47.2% 56.9% 2.1%
    (Inc)/dec in stock 1.6% 2.3% 3.1% 0.9% 66.8%
    Other expenditure 21.0% 19.7% 18.5% 16.4% 17.4%

    Abbott Vs MNC peers: Over the last few quarters, on the revenue front, despite being on par with Pfizer, Abbott has been lagging behind Glaxo and Aventis. The seesaw topline performance indicates a lack of direction. At the operating level, Glaxo and Pfizer's restructuring initiatives have started reaping benefits, which is reflected in the upward trend of margins. However, though Abbott has maintained its margins above 15%, it is still not comparable with that of Glaxo and Aventis.

    What to expect?
    At the current price of Rs 671, the stock is trading at a price to earnings multiple of 18.5 times its annualised 1HFY06 earnings, which is at the higher end of the valuation spectrum. Higher share of traded goods in the topline gives an indication of the company's weak presence in the Indian markets. However, this type of business model can be highly effective, now that the new product patent regime has become applicable in India. Post the product patent regime the company can aggressively launch new products from its parent's product stable in the Indian markets.



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