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Has it reached inflection? - Views on News from Equitymaster
 
 
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  • Nov 4, 2000

    Has it reached inflection?

    “When it rains, it pours”. This phrase is apt for the troubles that Hoechst Marion Roussel (HMR) has gone through over the last three years. The ban by the Government of India on one its key products Baralgan (7percent of turnover) in 1997, the collapse of the Russian market in 1998 (accounting for almost 15 percent of the turnover) and price control on brands such as Omnatax and Trental in 1999 hit HMR below the belt. As if this was not enough, the company had to go through with a painful restructuring post amalgamation with Roussel India (along with the attendant problems of integration). We take a look at HMR’s baptism by fire. But first, a look at the company itself.

    The fourth largest player in the domestic market, HMR is a 51 percent subsidiary of the international pharmaceutical giant $ 16.1 bn Aventis (formed with the merger of Hoechst AG and Rhone Poulenc). The company has strong products and caters to a wide therapeutic area. Its brands such as Combiflam (anti–inflammatory), Daonil (anti–diabetic), Avil (anti–allergic) Soframycin (dermatological) and Novalgin (analgesic) are household names.

    The management response to the crisis has been quite admirable. It responded through a series of restructuring initiatives over a period of two years. It closed down two of its plants in high cost Mumbai and shifted to relatively low cost areas such as Goa (formulations plant) and Ankleshwar (bulk drugs production). The sale of assets helped the company fund its expenditure for Voluntary Restructuring Scheme for 450 people a part from reducing its debt. (Infact, over the last ten year’s the company reduced its staff strength by more than 50 percent despite a near doubling of turnover over this period!).

    Besides, the company also rationalised its product pipeline. It discontinued with more than a dozen old products and sold off tailend brands such Haemaccel and Omnatax to Nicholas Piramal. Simultaneously, HMR’s parent allowed it access to new products which the latter introduced in the country. These include top of the line products such as Cardace (cardiovascular) Amaryl (an oral anti–diabetic), Cefrom (antibiotic) Allegra (anti–allergic) and Frisium (anti–epileptic) which have been well received in the Indian market. The new products such as Amaryl and Allegra are likely to help HMR graduate its patients to newer generation therapies from its existing blockbusters Daonil and Avil respectively. Also, its newer products are out of the purview of the Drug Price Control Order (DPCO). The fact remains that almost 60percent of the company’s revenues accrues from products under price control and this has prevented the company from even marginally increasing its prices. HMR, for example sells 1 billion capsules of Avil at the rate of Rs 0.25 per tablet. Even an increase of Rs 0.15 per tablet could increase HMR’s pre–tax profit by Rs 150 million (i.e. almost one third of FY00’s pre–tax profit).

    Hoechst's Prescription Profile
      FY00 % of
    turnover
    YOY
    growth
    FY01(E) YOY
    growth
    Clarofan 300 6% -25% 300  
    Travid 245 5% 2% 245 0%
    Hostacycline 237 4% 3% 249 5%
    Baralgan 92 2% 15% 120 30%
    Novalgin 575 11% 15% 587 2%
    Avil/Allegra 540 10% 20% 605 12%
    Treantal/Cardace 553 10% 20% 595 10%
    Rabipur Vaccine 660 12% 27% 759 15%
    Daonil/Amaryl 640 12% 25% 736 15%
    Bulk Drugs 98 2% -47% 98 0%
    Other Vaccines 0 0%   100 0
    Combiflam 666 13% 5% 699 5%
    Soframycin 496 9% 5% 521 5%
    Others 220 4% -31% 120  
    Total Turnover 5,322   2% 5,734 8%

    The hugely profitable exports to Russia have also restarted in the current year though they are no where near the levels they were a couple of year’s ago. Infact, the exports to Russia contribute almost 50percent to the bottomline despite a 15percent contribution to the topline. The company’s revenue growth and profitability still are critically dependent on its export business particularly to the CIS countries.

    A legal merger with Rhone Poulenc in India seems to be off (for the time being atleast) since HMR’s parent Aventis is contemplating the divestment of Rhone Poulenc’s business in India. This may not be too bad for HMR since Rhone Poulenc has a relatively older product portfolio, which would need to be rationalised. Add to that another round of restructuring that the amalgamated company would require. Infact, HMR in India would rather be better off without Rhone Poulenc!

    What is most positive for the shareholders of HMR is that unlike other MNC pharmaceutical companies HMR has so far not set up a 100 percent subsidiary as a vehicle for distributing its newer products within the Indian market.

    All these measures have helped the company post a 35 percent growth in its bottomline in FY2000 despite a 1.4 percent rise in the turnover. And this has been sustained in the first half of the current year where the company’s net profit has doubled. With the restructuring almost over and the costs of restructuring having been written off, the company’s bottomline is likely to grow much faster in the coming years.

     

     

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