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Pfizer: Higher costs outweigh sales growth

Nov 1, 2011

Pfizer India has announced its second quarter results for 2011-12 (2QFY12) results. The company has reported 22% YoY growth in sales and 11% growth in net profits. Here is our analysis of the results.

Performance summary
  • Sales grow by 22% YoY led by strong growth in the core pharmaceuticals and clinical services businesses.
  • Operating margins decrease by 420 bps (4.2%) to 17.8% due to increase in raw material prices and other expenditure.
  • Despite the 1% fall in operating profits, net profits increase by 11% YoY on account of higher other income.

Financial performance: A snapshot
(Rs m) Quarterend Aug, 2010 Quarterend Sep, 2011 (2QFY12) Change Half Yr end Aug, 2010 Half Yr end Sep, 2011 (1HFY12) Change
Net sales 2,380 2,898 21.8% 4,628 5,511 19.1%
Expenditure 1,857 2,382 28.3% 3,743 4,575 22.2%
Operating profit (EBIDTA) 523 516 -1.3% 885 935 5.7%
EBDITA margin (%) 22.0% 17.8%   19.1% 17.0%  
Other income 159 222 39.5% 374 442 18.3%
Depreciation 25 26 3.6% 47 49 4.7%
Interest - -   - -  
Profit before tax 657 713 8.4% 1,212 1,328 9.6%
Tax 218 243 11.3% 413 446 7.9%
Exceptional Gain / (Loss) (15) -   (27) -  
Forex Gain / (Loss) - -   - -  
Minority Interest - -   - -  
Profit after tax/(loss) 425 470 10.6% 772 882 14.3%
Net profit margin (%) 18% 16%   17% 16%  
No. of shares (m) 30 30   30 30  
Diluted earnings per share (Rs) 14 16   26 30  
Price toearnings ratio (x)*         22.4  
*The company has changed its accounting year from 1st December - 30th November to 1st April-31st March.
The current quarter is from 1st July, 2011 to 30th September, 2011 while the comparable
quarter was from 1st June, 2010 to 31st August, 2010. Hence the figures are strictly not comparable

What has driven the performance in 2QFY12?
  • Pfizer clocked a growth of 21.8% YoY during the quarter as all its 3 divisions - pharmaceuticals, animal health and clinical services saw healthy growth. The pharmaceutical division (contributes ~83% to sales) grew by 17.4% YoY. This was despite the lower single digit growth in two of Pfizer's most established products - Becosules and Corex. Strong growth in other products like Lyrica and Claribid helped the pharma business to grow well.

  • The clinical services business (mainly clinical trials) continued to grow at a very healthy rate with this quarter showing a growth of 62.2% YoY. The animal health segment (contributes ~11% to sales) showed a slower growth of 13% YoY due to discontinuation of one product. Excluding the discontinued product, the animal health business clocked a growth of 17% YoY.

  • Revenue break-up
    (Rs m) Quarterend Aug, 2010 Quarterend Sep, 2011 (2QFY12) Change Half Yr end Aug, 2010 Half Yr end Sep, 2011 (1HFY12) Change
    Segment Revenues
    Pharmaceuticals 2,038 2,392 17.4% 3,951 4,497 13.8%
    Animal Health 289 326 12.8% 565 640 13.3%
    Services 109 177 62.2% 229 367 60.4%
    Total Sales 2,436 2,895 18.9% 4,745 5,504 16.0%
    Segment EBIT Margins
    Pharmaceuticals 33% 24%   29% 23%  
    Animal Health 7% 13%   15% 20%  
    Services 11% 10%   11% 10%  

  • The operating margins decreased by 420 bps to 17.8%. Increase in packaging materials costs and sugar prices led to a 510 bps increase in raw material costs. The other expenditure also increased by 160 bps on account of higher travelling overheads and freight charges. This was partly offset by 260 bps fall in employee costs. Thus, operating profits declined by 1% YoY.

  • Despite the dip in operating profits, net profit increased by 10.6% YoY on account of higher other income. Excluding the exceptional loss in the August 2010 quarter, the net profits increased by 7% YoY.

  • Pfizer has commenced marketing of Biocon's Insulin and Glargene in the domestic market under its own brands Univia and Glarvia respectively (Is this the parent company .

  • In the pharmaceutical business, Pfizer has been aggressively introducing products in the branded generics space since 2009. Currently, the branded generics segment contributes around 4% to the net sales and is expected to increase to 10% in the next 3 years. The management indicated speeding up product launches in this category. The company has plans to launch around 10-15 new products this year.

  • A group company repaid its outstanding loan to Pfizer India and the cash levels shot up to Rs 8,770 m at the end of the quarter. This translates to Rs 294 of cash per share.

What to expect?
The company had invested in creating pipeline of over 20 branded generics products in the past 2 years and has also increased the field force (in last 2 years field force is up by 1,200). Pfizer has also been incurring higher expenses to promote its products. It also intends to enter into newer segments such as CNS and diabetes. The company is aggressively promoting Prevnar 13 vaccine (only vaccine in India for pneumococcal disease) to get incremental revenues. The company is also focusing to improve its field force productivity and should be able to rationalize the costs ahead. We expect that Pfizer will start getting the benefits of its efforts in a span of next 9 to 12 months.

At the current price of Rs 1,345, the stock is trading at a multiple of 17.5 times our estimated FY14 earnings. However, even after taking into account the future growth prospects, current valuations do not leave much on the table for investors.

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Jun 18, 2021 03:37 PM