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MNC Pharma: And the performers are... - Views on News from Equitymaster
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  • Sep 6, 2005

    MNC Pharma: And the performers are...

    The first half of the year has gone by and MNC pharma companies, which largely follow a calendar year, have managed to stage a comeback after the difficult first quarter (March 2005 ending), which was plagued by VAT related issues. In this article, we compare the 1HFY06 performance of the 4 MNC pharma companies under our research coverage viz., Pfizer, Abbott India (both November ending), Glaxo and Aventis (both December ending).

    Financial performance: A snapshot
    Pfizer Glaxo Aventis Abbott
    Net sales (Rs m) 2,679 7,412 3,884 2,035
    Net sales growth (%) -1.4% 3.0% 10.1% 4.3%
    Operating profit (Rs m) 474 2,282 1,019 353
    Operating profit margin (%) 17.7% 30.8% 26.2% 17.3%
    Operating profit growth (%) 59.1% 11.5% 11.2% -16.2%
    Interest (Rs m) 2 - - -
    Depreciation (Rs m) 66 75 87 19
    Net profit (Rs m) 289 1,503 578 278
    Net profit margin (%) 10.8% 20.3% 14.9% 13.7%
    Net profit growth (%) 60.6% 9.8% -11.6% -34.7%

    What has driven performance in 1HFY06?
    Revenues: The confusion related to VAT took a sever toll during the January to March 2005 quarter (leading to de-stocking at the wholesalers' levels) affecting most of the companies in the Indian pharmaceutical industry. However, the 4 MNC pharma companies considered here felt the impact of this differently. Pfizer, for instance, being a November ending company, was impacted by VAT concerns in both the quarters (1Q and 2QFY06), the effect being more pronounced in the second quarter. Therefore, while its peers recovered in the second quarter to post gains, Pfizer saw a decline in its topline (down 1.4% YoY).

    Glaxo has been at the two extreme ends of the pole. This can be gauged by the fact that while the VAT impact was most severe in Glaxo's case in the first quarter (23% YoY decline in revenues), it posted the strongest revenue growth (29% YoY) in the second quarter, enabling it to register a 3% YoY growth in 1HCY05. For both Aventis and Glaxo, their power brands have helped propel growth. In Pfizer's case, most of its key brands, except 'Corex', registered growth. Abbott India also performed relatively well as compared to its peers and is actually the second best performer on the revenue front (up 4.3% YoY).

    Margin story: The 'Big 3' i.e. Glaxo (up from 28.4% in 1HFY05 to 30.8% in 1HFY06), Aventis (up from 26.0% in 1HFY05 to 26.2% in 1HFY06), and Pfizer (up from 11.0% in 1HFY05 to 17.7% in 1HFY06), have witnessed considerable margin improvement in the first half of the year. This is owing to various cost containment measures undertaken by these companies at the operating level. However, despite a tight leash over costs, on the margin front, Pfizer is lagging well behind Glaxo and Aventis. This is owing to its stagnant revenue growth. Aventis' margin improvement has been a result of increasing share of outsourcing (export sales) and better product mix, which is due to its strong focus on strategic brands. Abbott faced pressure on its margins (fell from 21.6% in 1HFY05 to 17.3% in 1HFY06), owing to the levy of excise duty on the basis of MRP and a considerable increase in the purchase of finished goods.

    Profitability picture: While efficiencies at the operating level translated into higher profitability for Glaxo and Pfizer, in Aventis' case, a higher tax outgo has dented the bottomline picture. As far as Abbott is concerned, a fall in operating profits coupled with a 65% YoY reduction in other income resulted in a 34% YoY decline in net profits.

    What to expect?
    The new patent regime, which has come into force from 2005, will be significant for these MNC pharma companies, which have been preparing themselves for the same. Most of these companies have restructured themselves to take advantage of the new patent regime. While there is not likely to be any significant impact of the same in the topline of these companies in the initial couple of years, in the long run, there is a high probability that these MNC companies will gain market share in high value patented products.

    Pfizer still needs to catch up with Glaxo and Aventis on the margin front. The margin improvement is expected to come from an increase in turnover, price increases in products wherever it is possible and continued efficiency at the operating level. As far as new patented launches are concerned, while Glaxo and Pfizer will introduce patented products only from 2007 onwards, Aventis being more aggressive, is likely to launch them earlier.

    Considering the fact that both Glaxo and Aventis have been strong on the revenue and profitability front and the fact that they have a strong parent company from whose folio we can see the launch of new patented products, these companies are our preferred plays in the MNC pharma space for the long term.

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