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Pfizer: Is the giant turning? - Views on News from Equitymaster
 
 
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  • Oct 4, 2002

    Pfizer: Is the giant turning?

    In a spate of three years, Pfizer Inc has tripled its revenue base backed by path breaking acquisition of Warner Lambert and Pharmacia. The total acquisition cost for these two subsidiaries was in excess of US$ 150 bn!

    Read More about Pfizer Inc.

    Pfizer India too has been in a restructuring mode, following the aggressive acquisition strategy adopted by its parent. While the operational integration with Parke Davis is already in place, the company is yet to take a decision on merging its operation with Pharmacia’s subsidiary in India.

    Pfizer is expected to declare consolidated figures including Parke Davis for the year ended November’02. However, the stock price of the company has slipped around 20% in the last three months. We take a re-look on the scenario post merger, the benefits of integration and the expected valuations of the merged entity going forward.

    The merged entity in India would have robust financial numbers with sales expected around Rs 6 bn. This should take Pfizer India amongst the list of top five pharma players and a combined market share of 3.2% in the domestic industry.

    Pfizer: Brand Coffer
    Particulars Therapeutic Segment
    Corex (& line extensions) Cough Preparation
    Becosules (& line extensions) Vitamin B Complex
    Benadryl Cough Preparation
    Dolonex NSAID
    Gelusil Anti-acid
    Profinex Protein Supplements
    Mini Press Cardiovascular
    Teramycin Anti-infective
    Waterbury's Vitamins/ Cough
    Amlogard Cardiovascular
    Hepashield Hepatitis B Vaccine
    Magnex Antibiotics

    Apart from financial consolidation, the merger with Parke Davis is expected to add significant brands to the company's already impressive product portfolio. Pfizer would inherit brands such as Benadryl, Gelusil and Listerine from Parke Davis. The combined brand portfolio looks impressive with some of the leading brands in the domestic pharma. Further, the company has also exhibited superior brand extension skills in defending the profitability of mature brands like Becosules and Corex by launching pediatric variants and new methods of dosage administration. The top 15 brands of the company are expected to contribute more than 70% to its revenues.

    Corex and Becosules brands of the company deserve the distinction of being the largest and second largest brands in the Indian pharma segment with leadership position in their respective therapeutic segment. Encouragingly, growth for most top brands is attractive, even on a higher base.

    Over the years, Pfizer’s expertise has been to identify large segments and dominate them. The product portfolio of the merged entity is highly skewed towards vitamins, anti-tussives and pain management (anti-rheumatic) segment, which are relatively older generation. However, the company has leadership position in each of these segments and these are expected to continue with their dominance in the overall revenue mix going forward.

    Pfizer: Old But Focused Therapies
    Particulars Anti-Tussives Vitamin B-Complex Anti-rheumatic
    Pfizer’s market share (%) 27% 25% 5%
    Best competitor’s market share (%) 22% 14% 10%
    (Nicholas) (E. Merck) (Novartis)

    Integration benefits
    Pfizer brings on the table a small portfolio of mega brands, but Parke Davis brings a larger portfolio of products. While on one hand, the merger would help Pfizer create a strong hold in the OTC segment; the company’s aggressive marketing field force would have a large product portfolio to push. Pfizer’s marketing team is considered to be the best in the industry. Inline with the renewed thrust on consumer healthcare division and a larger product basket post the integration with Parke Davis, the company now has dedicated team for the consumer healthcare segment.

    Pfizer- Few but strong brands
    Company Ranking in terms of sales* No. of Products Sales/ Product
    (Rs m)
    Aventis 6 55 94
    Pfizer (merged) 5 78 74
    GlaxoSmithKline 1 210 53
    Ranbaxy 2 237 35
    Nicholas Piramal 4 217 25
    Cipla 3 358 21
    * Expected rankings post Pfizer-Parke Davis merger

    Barring Benadryl, there is little overlap in the product profiles of both the companies even in common therapeutic segments. Even after the merger, the sales value per brand for Pfizer is expected to be impressive, which clearly vouches for its strong brand portfolio.

    Further, operational integration of manufacturing facilities and rationalization of workforce is expected to bring considerable benefit to the merged entity. A VRS of Pfizer’s workforce and closure of Parke Davis factory at Hyderabad has already taken place. The management expects savings to the tune of Rs 50 m in FY03 and another Rs 100 m of additional annual savings subsequently.

    Pfizer is also upgrading its Thane plant at a cost of Rs 225 m. Post this upgradation, the management expects to explore global supply agreements with the parent company for some of the products from this plant.

    Both Pfizer and Parke Davis have introduced few new products due to weak patent laws and competition in the formulations market in the domestic market. Considering the parent’s stand on new product introductions, the situation is not expected to improve. The company now seems to be tackling this by tying-up with local pharmaceutical companies.

    Particulars Pfizer Parke Davis Merged
    ORG Rank 11 23 5
    No. of Products 24 54 78
    Sales per brand (Rs m) 134 40 74

    Tie-up with Shantha to expand portfolio & capitalize on marketing skills
    It may be re-called that Pfizer has paid Shanta Biotech Rs 60 m to be the exclusive co-marketer for some of the products coming out of Shantha Biotech’s stable. Apart from Hepashield, Pfizer could also market other products of Shanta Biotech.

    However, with increasing competition in the Hepatitis B vaccines segment, this segment is expected to de-grow in the current year. However, various big bio-pharma products are under development in Shanta Biotech’s stable, for which Pfizer would have first right to refusal. In the pipeline are combination vaccines, Interferon, Humalog (insulin), Streptokinase and monoclonal antibodies. However, Pfizer's management recently informed that Human Insulin that is being developed by Shantha is in a separate subsidiary and hence Pfizer may not get the first right to refusal.

    DPCO expected to be booster…
    The merger is expected to bring down the DPCO coverage of the company to around 19% from the current 24% of the company’s turnover. Further, the government is expected to announce final list of drugs under the new DPCO policy.

    Becosules (vitamin brand), which would contribute around 14% to the merged entity, is expected to come out of DPCO coverage. On the other hand, Dolonex, (around 6% of the merged turnover) another major brand of the company, might come under the coverage. Net net, the new DPCO is expected to be beneficial to the company. Becousules is almost Rs 800 m product and considering its strong brand name, a small price increase on the product could provide a considerable boost to the company’s bottom line.

    Impact of Pharmacia acquisition in India
    Coming to the recent acquisition of Pharmacia by Pfizer Inc, in India, the acquisition is likely to push Pfizer India to the fourth largest position in the domestic pharma industry. Though the merger of Indian operations is evident, the management is yet to announce the finer details of the same.

    Pharmacia’s Indian operations consist of two entities viz; Pharmacia India Pvt. Ltd and Pharmacia Healthcare Ltd. Pharmacia Healthcare is erstwhile Abbott Laboratories, which Pharmacia acquired in Jan’02. Pharmacia Healthcare has annual sales of Rs 896 m. However, its margins don’t compare favorably with that of Pfizer-Parke Davis and hence there is unlikely to be a substantial addition to Pfizer’s bottom line. It is likely that Pfizer may have to rework another restructuring exercise based on Pharmacia’s brand portfolio.

    Subsidiaries concerns
    The structure of Pfizer Inc’s operation in India is likely to become complex. While Pfizer and Warner Lambert already have a subsidiary each operating in India, Pharmacia would add another one to the bouquet. Investors have always been concerned about existence of 100% subsidiary of MNCs in India fearing that business could be diverted to these subsidiaries going forward.

    However, the management has recently clarified on the structure of these entities. It has been made clear that there would be manufacturing / marketing operations in Pfizer’s 100% subsidiary. This subsidiary would help in registering trademarks / patents for Pfizer Inc. On the other hand, Warner Lambert subsidiary would focus purely on confectionary business (confectionary business contributes a considerable 8% of Pfizer’s Inc’s revenues). However, nothing has yet been decided on the Pharmacia’s subsidiary in India.

    Valuations
    There have always been two schools of thought for Pfizer’s valuations. One of the biggest strengths of the company is the product portfolio of the parent company, which is enviable on a global basis. To put things in perspective, the parent company has 7 products with revenues of billion dollars plus currently in the market. Besides, this does not include potential introductions from research pipeline. Thus, there is enormous hidden strength for the Indian company if these products are launched in India. Introduction of even a single blockbuster product could dramatically change the fortunes of Pfizer India.

    The second strength of the company is a strong marketing team. A feel of the strong positioning of Pfizer's brands can be judged from the fact that Corex (cough preparations) despite being one of the oldest brands in the country, still consistently logs above industry growth rates.

    However, the discouraging fact is that Pfizer India has a completely different profile vis-a-vis its parent. While fast growing and lifestyle therapeutic segments occupy a lion’s share in the parent’s portfolio, the domestic portfolio is more titled towards older generation molecules. The Indian subsidiary has not derived any major benefit from global launches. The Indian subsidiary (post merger) contributes only 0.3% of Pfizer Inc’s global turnover, which is insignificant. Considering the parent company’s stand on patent laws in India, one cannot expect the domestic portfolio to be aligned in the near term. Further, growing competition in the domestic market (particularly in the OTC segment) and aggressive entry of established domestic players, brand positioning led growth may receive a break.

  • Click here to view latest financials

    At the current market price of Rs 415, Pfizer India’s valuations are at a 5-year low. The stock is currently trading at a P/e of 13.3 x its FY03 (year ending Nov'02) consolidated earnings. For the first time, the company is aggressively looking at in-organic growth opportunities (both brands and business acquisition), backed by a strong balance sheet. The company is targeting above industry growth rates (at around 10%) backed by strong performance of its core brands and co-marketing / in-organic growth opportunities. Even at a conservative estimate of 6% growth, valuations look attractive at the current price.

    Comparative Valuations
      Glaxo Novartis Pfizer Aventis
    CMP (Rs.) 365 238 415 365
    P/e - 02 37.6 12.3 20.4 12.0
    P/e -03 E 18.9 10.8 13.3 11.6
    Mkt. Cap (Rs m) 27,010 7,136 11,786 8,004
    Mkt. Cap/ Sales (x) 2.5 1.5 1.8 1.4

     

     

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