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2QFY05: Pharma sector revisited - Views on News from Equitymaster
 
 
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  • Nov 8, 2004

    2QFY05: Pharma sector revisited

    Be it a bull run or a free fall, pharma sector is there for investors rescue in either cases. In the performance review of June quarter, we noticed that the pharma sector cushioned investors from the disgrace of free fall of the market. In this quarter too, the pharma sector has outperformed the Sensex by almost 4%! While the BSE Sensex has risen by almost 16.4% since July 2004, the pharma index is up by 20.7% in the same period.

    The second quarter of the financial year was a mixed bag for pharma companies in our universe (5 MNC and 6 Indian companies). The companies under our universe grew by 11% YoY in sales. While these are just numbers, let’s delve further into the quarter under consideration.

    Firstly, investors have to bear in mind that MNC pharma companies largely cater to the domestic market while Indian companies have increased the contribution to revenues from international markets.

    Rs m) Sep Q'03 Sep Q'04 Change
    Net Sales 39,625 43,943 10.9%
    Operating Profit (EBDIT) 8,828 10,375 17.5%
    Operating Profit Margin (%) 22.3% 23.6%  
    Profit after Tax/(Loss) 6,716 8,557 27.4%
    Net profit margin (%) 16.9% 19.5%  

    MNC Companies

    Looking at MNC’s performance, it can be said that the growth in the topline was pretty good considering their old product portfolio. Glaxo and Aventis Pharma led the pack. In case of Glaxo, the major driver of the topline was its merger with Burroughs Wellcome. If one excludes this merger effect, the growth in topline stands at 13%, which was basically driven by the growth of its vaccine portfolio. Aventis Pharma showed growth on the exports side, which grew by 63% in the quarter. Some of its brands in the domestic market also posted double-digit growth. The other three major companies did not show any significant growth in the quarter. With the impending patent regime, MNC companies are well poised to capitalize on the domestic opportunity. However, the gains will be realised over a period of time as opposed to 2005 itself.

    MNC Companies Net Sales Operating Profit Net Profit
    Sep Q'03 Sep Q'04 Change Sep Q'03 Sep Q'04 Change Sep Q'03 Sep Q'04 Change
    Aventis 1628 1,841 13.1% 364 618 69.8% 261 425 62.8%
    Abbott 1041 1,046 0.5% 261 230 -11.9% 196 433 120.9%
    Glaxo 3114 3,736 20.0% 786 1,180 50.1% 573 1,725 201.0%
    Novartis 1245 1,254 0.7% 147 245 66.7% 265 217 -18.1%
    Pfizer 1349 1,342 -0.5% 156 170 9.0% 123 142 15.4%
    Total 8377 9,219 10.1% 1,714 2,443 42.5% 1,418 2,942 107.5%
    Operating Margin 20.5% 26.5%              
    Netprofit Margin 16.9% 31.9%              

    Indian Companies

    In the ‘Equitymaster’ pharma universe, we have 6 Indian companies under coverage viz. Cipla, Dr Reddy’s, Nicholas Piramal, Ranbaxy, Wockhardt and Sun Pharma. The consolidated performance of these companies was encouraging (sales growth of 11% YoY).

    On the international side, poor performance by Dr Reddy’s and lackluster growth in sales of Ranbaxy subdued the overall performance. Going forward, the growth in topline is likely to accelerate for companies like Ranbaxy and Dr Reddy’s. The stellar performance of Cipla continued in this quarter too (topline growth of 28%). This performance was basically led by the exports of formulations (up 76% YoY).

    Indian Companies Net Sales Operating Profit Net Profit
    Sep Q'03 Sep Q'04 Change Sep Q'03 Sep Q'04 Change Sep Q'03 Sep Q'04 Change
    Cipla 4,512 5,814 28.9% 895 1,319 47.4% 695 959 38.0%
    Dr Reddy's 5,236 5,242 0.1% 1,134 697 -38.5% 889 464 -47.8%
    Nicholas Piramal 3,684 3,757 2.0% 757 824 8.9% 523 560 7.1%
    Ranbaxy 12,131 13,614 12.2% 2,801 3,125 11.6% 1,871 2,004 7.1%
    Wockhardt 2,852 3,175 11.3% 608 800 31.6% 491 558 13.6%
    Sun Pharma 2,833 3,122 10.2% 919 1,167 27.0% 829 1,070 29.1%
    Total 31,248 34,724 11.1% 7,114 7,932 11.5% 5,298 5,615 6.0%
    Operating Profit Margin 22.8% 22.8%              
    Net Profit Margin 17.0% 16.2%              

    What to expect?

    While MNC pharma companies are totally dependent on the Indian market for growth (Aventis being the exception), we expect contribution from exports to increase for Indian pharma majors, despite a challenging environment (the challenge is both on the pricing side as well as on the regulatory side). While Indian companies are looking to grow their topline by focusing in bulk drugs and generics segment, MNC companies are eyeing the opportunity post 2005, when the new patent regime will come into force in India.

    In our view, the rationale to invest in Indian pharma company or a MNC is a matter of risk profile. Indian pharma majors will have an uphill task to grow in the domestic market (post the patent regime) and compete with the already established global majors in the international markets. As far as MNC companies are concerned, the access to R&D capabilities and products provide significant competitive advantage. At the same time, Indian companies have cost and scale advantage. And, the R&D activity that is being pursued by Indian pharma companies will bear its fruits in long run.

     

     

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