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Pfizer: Coming back to health

Sep 21, 2004

Pfizer India is one of the leading MNC pharma companies operating in India. It is a 40% subsidiary of the world's largest pharma company Pfizer Inc, which had sales of US$ 40 bn in 2003. It is a leading company in the Indian markets with key brands such as Corex (a cough syrup) and Becosules (a B-complex supplement), the two being brands with a revenue of over Rs 1 bn each. Most of the company's products are OTC (over the counter) products with strong brand equity. The global merger of Pfizer with Parke-Davis and Pharmacia has led to a consolidation of these companies in India as well. These two mergers have significantly improved the therapeutic coverage of the company. Although the company derives a majority of its revenues from the pharma business, it also has a presence in animal health and clinical development operations. During the year ended November 2003, while the pharmaceutical business contributed 86% to the total revenues, the animal health segment contributed about 10% to the total revenues and clinical development operations contributed 4% to the revenues.

In the Clinical development segment, Pfizer recorded a 20% growth in FY04. The company carries out clinical trials on behalf of the parent company. Although, this business proposition offers lot of scope for revenue growth to the company going forward, the revenues from this segment will depend upon the ability of the company to obtain further contracts from its' parent.

Now, turning to the company's performance in the recent quarters, one observes that they have not been very encouraging for the company. Both sales as well as profits have declined. The basic reason for the fall in sales is the general slow down in the domestic pharma market. Since the company is dependent on a very few products for its revenues a slowdown is likely to impact Pfizer the most. Also in the second quarter ending May 04 the company faced problems with the quality of one of its leading brands Gelusil (Rs 300 m in sales).

Also, the work force rationalization exercise has put pressure on the company's profitability in FY04. Pfizer had written off Rs 167 m during the FY04 on account of VRS (Voluntary Retirement Scheme). The company's work force rationalization exercise has been continuing from FY02 and the impact can be gauged from the fact that the sales of the company has almost doubled in last four years (from FY00 to FY04) but the total number of employees has grown by only 40%.

Over the years Pfizer has time and again delivered good results in terms of sales and profits. The chart below shows the revenue growth as well as the trend of operating margin and net profit margin of the company in last five years. The number after 2003 include the merger with Parke Davis.

Going forward, as the management has indicated the company will move from being a pure OTC player to the prescription drugs market and it may launch several drugs in that category. However, with the new patent regime, which is likely to be implemented by Jan 2005, the company is likely to gain significantly as the parent has a large pipeline of patented drugs to offer to the Indian markets. Also with the completion of the employee rationalisation process we are likely to witness an improvement in margins, a glimpse of which was seen in the quarter ending May 2004.

The stock is trading at Rs 503, a P/E multiple of 33x, based on its annualized 1HFY05 earnings Though valuations look stretched, one must remember that Pfizer is in a phase where growth in the profits will be faster than its sales growth since the full benefits of the restructuring is yet to come. Apart from this the new patent regime will bring in benefits for the company in the form of new product launches as we believe that the company is likely to aggressively explore this market opportunity, which is likely to contribute to a higher topline growth in the future.


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