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MNC pharma: Pick & choose - Views on News from Equitymaster
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  • Nov 6, 2000

    MNC pharma: Pick & choose

    Last week we looked at the prospects of the top Indian pharma companies Indian Pharma: Back With a Bang This week we take a look at the prospects of select multinational pharmaceutical counters vis-ŕ-vis their results.

    Pfizer: The one MNC company every one loves to hate. And the reasons are not far to seek. Among all multinational pharmaceutical companies, Pfizer seems stuck with its image of being unfriendly to minority shareholders. The impression has gained ground due to the management’s perceived obsession to establish a 100% subsidiary, which it has finally got permission to establish (after three rejections from the Foreign Investment Promotion Board). Also, Pfizer has also been perceived as relying too much on its old products, notably Corex and Becousules, despite having one of the strongest pipelines internationally (with 138 compunds developed inhouse).

    Despite apprehensions about the intentions of the management, Pfizer however, continues to report healthy growth rates. The company has delivered a 74% increase in pre–tax profits in the first six months of the current year, despite Becousules (its B–complex vitamin) being brought under price control. (Becousules contributes around 20% to the company’s turnover and the National Pharmaceutical Pricing Authority has reduced its prices by 30% in the current year.) This has been led by the success of Hepashield, a Hepatitis–B vaccine that the company has introduced in collaboration with Shanta Biotech. Being a strong marketing company the company is reported to have already clocked a turnover in excess of Rs 250 m in the first year of the product launch. This would amount to almost 6.50% of its anticipated turnover in the current year ending November 2000 which is extremely impressive for a new product. Pfizer quotes at Rs 595, which implies an earnings multiple of 27 times FY02 (November 2001) earnings.

    Glaxo: The big daddy among multinational pharma stocks, Glaxo enjoys the largest market share in the domestic market. Its prescription brands such as Betnovate range (for skin infections), Salbutamol and Seretide (both anti–asthma) and Cetrizine (anti–allergic) command OTC status. However, the company is not doing too well off late. This is because of the trade boycott imposed on the company’s products in the Southern market. This was precisely the reason for the company reporting a 4% decline in topline in the third quarter for the current year. The trade boycott is unlikely to be sorted out soon and it is quite possible that the company’s fourth quarter numbers could also be adversely impacted. The stock, which quotes at Rs 413 is unlikely to fly in the short term.

    Hoechst Marion Roussel: The comeback king, Hoechst Marion Roussel (HMR) is the fourth largest player in the domestic market with strong products and a diversified product mix. Rationalising of its prescription profile, sell off of its unproductive assets (including two of its plants in costly Mumbai) and improving labour productivity have helped the company come back from the downturn it faced in the mid–nineties. All these measures have helped the company post a 35 percent growth in its bottomline in FY2000. 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. The stock quotes at Rs 465, which implies an earnings multiple of 29 times FY01 estimated earnings.

    Novartis: The company is in the midst of spinning off its agrochem unit in line with the hive off done by the parent company. This would leave Novartis India with a stable non–seasonal business yielding relatively higher margins. (Both the pharmaceutical and the vision care business yield much higher margins than the agrochemical business and the return on assets of these businesses are much higher too.) This spin off is in line with the international parent’s decision to hive off its agrochemical business and merge it with Astra–Zeneca’s agrochemical arm to form Syngenta.

    The overall operating margins of the company, which were around 17% can be expected to increase to around 20% post the hive off of the agrochemical division. Also, the company would be able to reduce its working capital requirements since the inventory days and debtors days can almost be halved from the present levels of 70 days and 55 days respectively. Consequently, the return on capital would zoom to a mind boggling 64% and the return on equity would improve to 42% in FY2001.

    Another trigger for the stock could be a sizeable sum from the grant of development rights at its real estate in Goregaon (a suburb of Mumbai). Last year, the company granted development rights on a part of this real estate and it fetched the company an amount of Rs 66 m. (Novartis’ real estate can fetch it another Rs 1.30 bn if it were to give development rights for its entire estate.) The stock quotes at Rs 657, which implies an earnings multiple of 30 times FY01 earnings. These earnings are for the pharma business alone. In addition a shareholder receives one share of the agrochem business.



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