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Pfizer: Conference call extracts
Oct 7, 2005

MNC pharma major Pfizer announced its results for 3QFY06 and 9mFY06 last week. To provide more information on its performance and future outlook, the company recently held a conference call. Below are the key extracts. What is the company’s business?
Pfizer India is a 40% subsidiary of the world's largest pharmaceuticals company, Pfizer Inc. It has some strong brands in its portfolio like Corex (cough syrup) and Becosules (B-complex supplement), which contribute over 30% to company's revenues. The company has merged Parke Davis and Pharmacia with itself. Pfizer derives most of its revenues from the pharmaceuticals division (86%). The company also has presence in the animal health (10%) and clinical development operations (4%) segments. In the animal health segment, Pfizer plans to capitalize on its parent's global leader status and become a major player. Pfizer also carries out clinical trials on behalf of its parent.

Pharma industry perspective: Pfizer expects the Indian pharma industry to register a 6% to 7% growth (down from the earlier estimate of 8%) during CY05. This lower growth is due to the fact that the industry witnessed subdued sales in the January to March quarter of the year on account of VAT related concerns. We expect Pfizer’s revenues to grow in line with the industry trend.

Robust revenue growth: Pfizer’s revenue growth in the third quarter was chiefly driven by strong performance of its consumer health brands ‘Benadryl’ and ‘Listerine’. Its other key brands such as ‘Becosules’ and ‘Dolonex’ reported an 18% and 20% YoY growth respectively. However, the sales of its other key brand ‘Corex’ was on a decline on account of regulatory issues.

Strategy to improve growth: Pfizer has been focusing on restructuring its field force by re-organizing the same into focused therapeutic groups. This restructuring was completed in early 2005 and will help improve margins going forward. Besides this, the company has also been focusing on providing training to its field personnel, concentrating on its brands and also refining its process of targeting doctors in a bid to increase the visibility of its products.

New product launches: Pfizer has plans to launch new products from its parent’s portfolio by early 2006. As far as patented products in India are concerned, the company will launch products and then see how the product patent law will impact the same rather than adopt a ‘wait and watch policy’.

Currently, Pfizer Inc, the parent company has two corporate entities operating in India, which are Pfizer India and Pharmacia. Pharmacia chiefly caters to the specialty segment such as oncology. The launch of products will be through the entity where the value creation will be the maximum. Therefore, if an oncology product is likely to be launched in the country, then it will be most probably launched through Pharmacia and will not impact Pfizer India.

Regulatory issues: The DPCO and the price control issues has been a subject of major contention in the last couple of months. It must be recollected that the Prime Minister’s task force had suggested a ‘price ceiling’ mechanism, wherein the ceiling prices of the drugs would be determined on the basis of the weighted average of the prices by sales value of the top three drugs. However, Pfizer has stated that ‘price ceiling’ is a form of price control because it implies that the prices cannot be raised beyond a certain point. It must be noted that price cuts have also been implemented on certain drugs including vitamins. Pfizer does not expect the price cuts in vitamins to affect its performance going forward.

What to expect?
At the current price of Rs 820, the stock is trading at a price to earnings multiple of 25.3 times our estimated FY08 earnings, which is at the higher end of our valuation spectrum. The management has indicated that it expects the operating margins to improve above 20% (average 17% in the last four years) going forward, in line with its peers such as Glaxo (28%) and Aventis (29%). 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.

Also, in the past, the company was not keen on introducing new products due to India’s patent laws, which recognised process patents and not product patents. However, post 2005, this scenario has changed with India accepting the WTO norms. The management has already indicated that it will look at launching 2 products a year and is planning to launch its first patented product from 2007 onwards. We believe that the company is set to aggressively explore this market opportunity, which is likely to contribute to higher growth in the future.

Having said that, VAT concerns affected the company’s performance in 1HFY06. Despite a robust revenue growth in the third quarter, the overall revenue growth in 9mFY06 was at a slower 4% YoY. As a result, we will be downgrading our numbers accordingly.

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