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Novartis India: An update - Views on News from Equitymaster
 
 
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  • Nov 9, 2001

    Novartis India: An update

    Novartis India has gone through a major restructuring exercise in the last one year. The company has hived off/ discontinued its loss making businesses and vertically integrated its operations. The results of the same are now becoming apparent.

    Novartis Restructuring Exercise- How it helped
    Dec’99 De-merged Seed/Agri business into Syngenta India Ltd in line
    with global operations. Though this was a profit making division,
    revenues to a large extent were dependent on the monsoons.
    April'00 Ciba CKD Biochem was merged with the company.
    The merger with Ciba CKD has given control to Novartis over
    its raw material required for its anti-TB business.
    Oct’00 Introduced a new division viz, Consumer Healthcare to take advantage
    of growing OTC market in India. The idea being to provide
    a fillip to the company’s topline growth.
    Jan'01 Ciba Vision business- a lens care business was closed down.
    The ophthalmic division of Ciba Vision transferred to Novartis India.
    The lens care business was a drag on the company’s profitability.

    In its latest quarterly results (Sept’01 ended), the company far outperformed its peers in terms of operating profit margins. While average operating margins of MNC pharma companies improved by around 100 basis points, Novartis recorded more than a 1,000 basis points jump in margins.

    Novartis, now has three distinct business divisions viz, Pharma, animal healthcare and consumer healthcare (OTC). In the pharma business the company has presence in both mass category (anti-inflammatory, anti-TB segment) as well as super specialty segments (like neurology, Cardiovascular, oncology).

    Though Novartis has launched four new products in the last six months, sales growth from the pharma business remained flat, growing at 2.7% in the concerned period against an average Pharma MNC growth of around 4%. This was mainly on account of competition from new generation molecules for its flagship anti-inflammatory brand ‘Voveran’ (which contributes around 20% of its turnover) and higher import duty on its immuno suppressant “ sandimmum” brand (which contributes around 10% of its turnover).

    Pharma business commands operating margins of around 23%, which is the best amongst all pharma MNC companies. However, topline growth remains a problem.

    Novartis- Division wise Breakup
    1HFY02 Sales (Rs.m) Growth % Margins %*
    Pharma 1970 2.70% 22.80%
    Consumer Health 199 24.40% 4.50%
    Animal Healthcare Business 186 40.90% 16.40%
    * Profit before interest and tax

    In the consumer healthcare division the company has presence in two major categories viz. cough/cold preparations (Otrivin, Tavegyl) and vitamins/mineral supplements (Calcium Sandoz, Sandocal, Hematrine and Nutrisan). The ‘Calcium Sandoz’ and ‘Otrivin’ brand are leaders in their respective segments.

    The newly established consumer healthcare division is showing healthy growth albeit on a smaller base. However, the operating margins in this segment were under severe pressure due to high brand building exercises and severe price competition in the segment. The animal healthcare business is also growing at an encouraging rate of above 40%, with fairly good operating margins.

    On the financial front, Novartis is expected to make considerable interest cost savings, as the company repays its debt of around Rs 948 m from sale of property (at Goregoan) and internal accruals. The sale of land is expected to accrue Rs 725 m over a period of four years.

    Conclusion
    The fact remains that in the pharma business the company has presence in niche specialty segments and its products command respectable market share in their respective therapeutic segment. However, the company is heavily dependent on some core brands (Tegretol, Voveran and Sandimmum) for its revenues, which together contribute a major chunk of its revenues.

    It is clear that the growth in the pharma business is purely subject to new product introductions from the parent’s stable. However, the parent company seems uncomfortable to introduce new drugs in India until patent protection is granted.

    To summarise, the restructuring exercise undertaken by the company has certainly yielded results but going forward the challenge for the company is two fold.

    • Improve topline growth in the pharma business
    • Make Consumer Healthcare business profitable.

    At the current market price of Rs 240, the stock trades 11x our expected earnings for FY02, which is at a discount to its peers.

     

     

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