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MNC Pharma: A comparison - Views on News from Equitymaster
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  • Oct 14, 2003

    MNC Pharma: A comparison

    In an article in our series on identifying stocks, we had discussed the key parameters that should be looked into while investing in an MNC pharma stock. In this article, we have analyzed some of the leading MNC pharma companies (GlaxoSmithKline Pharma, Pfizer, Aventis, Novartis and Abbott India) on the basis of some of the parameters that were mentioned in that article. Take a look at the following table.

    On a comparative basis…
    Parameter GlaxoSmithKline Pharma Pfizer Aventis Novartis Abbott India
    Relative importance of Indian arm to parent
    Contribution to parent's topline 0.7% 0.4% 0.7% 0.5% 0.4%
    Contribution to parent's bottomline 0.3% 0.2% 0.5% 0.3% 0.4%
    Parent's R&D as a % of global sales 13.7% 16.0% 17.9% 13.4% 8.8%
    Advertising exps. as
    a % of sales (Indian arm)
    5.7% 7.3% 6.0% 8.5% 2.1%
    Market cap to sales (x) (Indian arm) 3.3 1.8 1.9 2.4 1.8
    Net profit margin (Indian arm) 9.4% 14.0% 9.8% 13.2% 15.7%
    P/E (x)* (Indian arm) 17.5 24.2 13.9 15.7 8.4
    Note: All figures as per latest declared annual results
    * EPS is of the latest declared results (annualized)

    One of the key parameters that influence an MNC company’s domestic demand is its parent’s strategy for India. The parent will be inclined to focus on those subsidiaries that make a reasonable contribution to its topline and bottomline. As can be seen from the table above, none of the Indian arms contribute more than 1% to either the topline or the bottomline of the parent. While Glaxo and Aventis contribute the highest to the topline of their respective parent, Aventis contributes the highest to its parent’s bottomline among its peers. Thus we can conclude that, relatively speaking, Aventis India may be of most importance to its parent as compared to other Indian subsidiaries. The fact that Aventis has been receiving active support from its parent in making aggressive new launches further justifies our point.

    Another parameter that was considered important was the parent’s focus on research and development. Since in a regulated market, new drug discovery research and product launches are key to a pharma company’s survival, one way of understanding a company’s R&D focus is by calculating its R&D expenditure as a percentage of sales. Here again, Aventis tops the chart with 17.9%, followed by Pfizer and Glaxo, while Abbott is the laggard amongst these companies with 8.8%. Here again it needs to be noted that Pfizer, Aventis and Glaxo have the most enviable drug pipeline in the world. The Indian arms of these companies are likely to be the obvious beneficiaries of this R&D focus, as the new products are subsequently launched in India.

    Given the fact that the Indian arms of MNC pharma companies sell their products at a premium to the generics drug manufactures, these companies have to undertake nation-wide product awareness programs and also conduct seminars and conferences. Although these expenses eat into the operating margins, they are nevertheless essential to sustain volume growth. Hence, we see that Novartis has the highest advertising expenditure as a percentage of sales, followed by, Pfizer and Aventis. Abbott India, once again, scores the lowest.

    However, this ratio needs to be looked into, in combination with market capitalisation/sales ratio. This ratio gives us an idea of about the market’s perception of the company’s brand value. From the above table, we observe that Glaxo has the highest market cap to sales ratio, followed by Novartis and Aventis. Thus, if the two ratios are seen in combination, Novartis and Glaxo stand out as companies with best brand image, while Abbott India has a relatively weaker brand.

    Among other parameters that should be looked into while analyzing an MNC pharma company, we have considered net margin and P/E ratio. On the margins front, Abbott India has the highest net margin followed by Pfizer and Novartis, while Glaxo has the lowest net margin. However, it is to be noted here that Glaxo’s margins were under pressure in view of the restructuring exercise undertaken by the company.

    On the valuations front, while Pfizer has the highest P/E, followed by Glaxo and Novartis, Abbot India is again the laggard. However, it is to be noted here that Pfizer’s P/E is abnormally high on account of a very low EPS in the recent quarters due to merger related issues. However, the fact that, Abbott India has the lowest P/E sums up its trailing the other MNCs in most of the parameters.

    Thus, we saw that an analysis of a few key parameters goes a long way in understanding the business strategy and vision of a company. It is also an Indicator of the fact that fundamental analysis of a company’s business does hold tremendous importance as although in the short run markets may behave irrationally, in the long run, they will correct to fundamentals. Hence, stick to fundamentals.



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