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Novartis: OPM under pressure

Oct 25, 2002

Novartis India has posted a net profit of Rs 318 m for 2QFY03, a rise of 48% over corresponding quarter last year. As against Rs 216 m in the corresponding quarter last year. However, the figures for the year are not comparable as the company demerged its agrochemical business, which resulted in this sharp decline in turnover and profits. The company also decided to exit the lens and lens care business of CibaVision with effect from December 2000 due to unviability of the same. The other income has also increased sharply by 276%, which has further aided bottomline.

(Rs m) 2QFY02 2QFY03 % change
Sales 1,233 1,306 5.9%
Other Income 61 231 275.9%
Expenditure 925 1,074 16.1%
Operating Profit (EBDIT) 308 232 -24.5%
Operating Profit Margin (%) 25.0% 17.8%  
Interest 4 2 -51.2%
Depreciation 20 54 171.2%
Profit before Tax 345 407 18.0%
Extraordinary Income - -  
Tax 130 89 -31.3%
Profit after Tax/(Loss) 216 318 47.7%
Net profit margin (%) 17.5% 24.4%  
No. of Shares (eoy) (m) 31.7 31.7  
Diluted Earnings per share* 27.2 40.2  
P/E (at current price) 6.3  

Pharma sales for the period closed at Rs 811 m registering a growth of 19% over the previous period. Growth was impacted by lower sales of the company’s transplant and oncology range of products. In late 2001, the company has carved out the Biochemie segment from the existing pharma business to align the portfolio with that of the parent company. The Biochemie sector primarily focuses on the therapeutic segments of Anti-TB, Anti-DUB (gynaecology) Anti-histamines, Antibiotics, Anti-ulcerants, Anti-diabetes and Cardiovascular. This sector registered sales of Rs 289 m declining by 8% compared to same period previous year. On a like to like basis (pharma and Biochemie division consolidated), the company has grown 10%, underperforming industry growth rates due to absence of new products.

Consumer Healthcare achieved good growth over last year largely driven by its popular OTC brand Calcium Sandoz. An encouraging growth in animal health care business was primarily driven by intensive marketing efforts in cattle and poultry segments and addition of three new licenced-in products in the cattle segment.

Novartis has initiated several measures to put growth on the fast track. It has launched a strategy to revitalise its mature product portfolio by introducing product extensions and variants. Innovative marketing focused on product customisation and disease administration would supplement Novartis efforts in this direction. Novartis has also identified the high growth CVS segment as a focus area where it proposes to launch brands from the parent portfolio. Introduction of new products will be the key growth driver for Novartis. Given Novartis AG’s strong pipeline of 69 drugs under development, one can expect a further ramp up in product introductions in future. NIL also plans to enter into co-marketing and alliances besides brand acquisitions to step up the growth momentum.brands and new introductions to drive growth.

At the current market price of Rs 213 , the stock trades at 6x 2QFY02 earnings. The future growth of the company depends on the success of the new products launched recently.We think the worry at the moment is the uncertainty over a new price control regime that is likely to bring the flagship brands of Novartis − Voveran, Regestrone and Otrivin − under price control. These brands accounted for 28% of retail sales of the company in the past 12 months. We estimate that this would translate into 16% of total sales or Rs760m revenues. In the past, when a new drug was brought under price control, the government has ordered a substantial downward revision in price. Assuming a modest 20% price cut would mean a loss of sales in FY03E of Rs167m and lower profit estimate of Rs602m against Rs753m currently. Such a 20% fall in profits would also affect our valuation of the company.


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