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MNC pharma: The opportunity

Sep 14, 2004

There are many MNC pharma companies operating in India. While some of them have really entrenched themselves in the country, others are involved more in being a trading entity. Companies such as Aventis, Glaxo and Pfizer have full fledged operations in India, others like Abbott, Sanofi, Novartis are more or less trading companies. This is one of the major criteria that also determine the depth of these companies in the Indian market place. In this article, we review the MNC companies that are present in India. An important factor to consider first is the parent's strategy for its Indian arm. While companies like Glaxo, Aventis and Pfizer are quite clear with their plans, others are yet to devise any concrete strategy. The Indian arm of most foreign pharma companies does not contribute significantly to the parent's profit and loss account. The maximum share in revenues by an Indian arm of an MNC is that of Glaxo, that is again very minimal at 0.7% of the parent's global revenues. While more than 50% of the revenues of global pharma majors come from patented products, the deregulated nature of Indian markets has meant insignificant contribution of the Indian subsidiaries of these companies.

However, the new patent regime that will come into force from 2005 will be significant for the Indian arms, which are preparing themselves for the same. Most of the foreign companies have restructured themselves, be it Glaxo, Pfizer or Novartis to take advantage of the new patent regime. Although, the new patent regime will come in force from 2005, we do not see any significant impact in the topline of these companies in first two years (2005 and 2006). But in the long run, these MNC companies will certainly gain market share in high value patented products. This will improve the contribution of the Indian arm to the parent's consolidated sales. It must be noted that companies like Pfizer, Glaxo, Aventis, which are focused towards R&D activities and have strong pipeline of patented products, are likely to make the most of the patent opportunity.

Apart from this, the other opportunity that exists for MNC companies in India is outsourcing. Most companies in western regulated markets are facing severe price competition from the low cost generics manufactured in India. These companies will in some time like to reduce their cost by out-sourcing their manufacturing to low cost countries such as India and presumably, the best choice for them would be their own subsidiaries. The example of this phenomenon is Aventis, which is already making bulk drugs for its parent company. In fact 22% of the revenues of Aventis is from outsourcing activity. Similarly, in case of Glaxo, it is supplying drugs manufactured in India to its parent company.

Most MNC pharma companies are valued higher than their Indian peers. This high valuation can be attributed to their strong presence, brands and the coming patent regime.

Company PE ratios
Abbott 11.1
Aventis 15.2
Glaxo 25.1
Novartis 13.6
Pfizer 51.6

While Pfizer's P/E is exorbitantly high, the basic reason for the same is its very low EPS in last few quarters. Glaxo's P/E gives us an idea of the fair valuation of an MNC company which has strong franchise amongst doctors and have strong brands. But company's like Abbott and Novartis have a comparatively lower P/E because of their business profile, which has more characteristics of a trading company. However, as these companies too restructure and try and become more than a mere trading company, their valuations too could improve. But till then, investors need keenly watch the developments on the MNC pipeline.

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