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Pfizer: In need of Healthcare - Outside View

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Pfizer: In need of Healthcare
May 10, 2010

At some point early in the new millennium the board of Pfizer apparently came to the learned conclusion that the company's operations were not gaining enough traction. The brand equity of its products and services was not doing enough to gain the company much market share. The apparent decision then was to leapfrog growth. That is to say, choose the acquisition route to stay in the running. Putting that objective in motion, the company soon enough swallowed up the MNC brand Parke Davis of Ferradol fame in 2003 (the latter in turn had acquired another MNC brand Warner Hindustan of the cough syrup Waterbury's Compound fame in 1988).Following in its wake was the acquisition of Pharmacia Healthcare in 2004, and in 2009 it merged Duchem Labs with itself. Along the way it sold its Chandigarh property in 2003, and in 2008 it lightened its load by offloading 4 consumer healthcare brands----Benadryl, Caldryl, Benylin and Listerine - to Johnson and Johnson for Rs 2.1 bn - which netted Pfizer a cache of loot.

But all that it could achieve after this process of consolidation was to log in gross sales of Rs 8.5 bn in 2009 with a net profit margin of 17.7% (but this margin is skewed in the sense that 'other income' accounts for a whopping 45% of pretax income). Other income is mostly made up of bank interest income and rental income.

The sales figure for 2009 is inclusive of the turnover of traded sales which clocked in 28% of gross sales in 2009. For all its efforts at pushing sales ,the company admits that the share of its pharma division was a mere 2.3% of the overall market-though the company's position rose to 12th rank in 2009 from 14th rank previously. For the matter of record, pharma sales accounted for 86% of overall sales (including traded sales) in 2009.The animal healthcare division apparently brought in the balance.

The company's tepid performance is all the more puzzling given the directors' prominent statement that the Indian pharma industry is slated to rank amongst the top ten in the world by the year 2015.

It also has a Clinical Operations division and a Medical Research division. How the latter two contribute to its brand equity is however indeterminate. It also takes active interest in combating HIV/AIDS , TB and smoking - and for its contribution towards making a better world Pfizer was awarded the best MNC in 2009 by Frost and Sullivan. How Frost and Sullivan came to this caustic conclusion is not known.

Its real claim to fame at this point is its cash hoard which is totally disproportionate to its scale of operations. At end 2009 this totted up to a cool Rs 8 bn or more - up from Rs 7.2 bn previously. At this rate it could shortly apply to the banking regulator for a licence to commence banking operations. For the present it does some 'banking operations' of sorts. At end 2009 it had loans outstanding of Rs 2.7 bn to two associate companies (a high of Rs 3.8 bn during the year), sporting such names as Pfizer Pharma India and Pfizer Products India. It has no equity stake in either company but earned interest from these loans. There is not much coherent info on the nature of activities of these two affiliates.

It is not easy to tabulate the operational figures of pharma companies because of the manner in which capacities, production and sales figures are stated. But from the available evidence, it appears that tablets, capsules and liquids brought in 92% of all manufactured sales. And on paper, the production capacity of these items is being flogged to the hilt. But atleast the company has a firm hold of what it sells. Sales are mostly for cash, and with a firm grip on inventories and payables, Pfizer is able to generate much cash from operations. With only a pittance spent on gross block and other investment options, the company merely added to its cash hoard.

Significantly, its plant is largely depreciated, with raw material imports accounting for over 40% of all raw material consumption-thus fluctuations on the forex front can tell on its pricing. Like all MNCs' it had direct interaction with over 19 of its parent's affiliates over the year, though the directors' claim that all such transactions were conducted at an arm's length distance.

For the immediate future then, the shareholders will have to bear with whatever calisthenics that the management can dish out, with the available resources at its command - which unfortunately at this point does not amount to much. But one hopes that the re-appointed CEO, Mr Keval Handa, will be able to rustle up something big in the near future. The company is paying him big bucks for his troubles - well in excess of Rs 30 m in salary and perks while wholetime director Dr. Bomi Gagrat gets well over Rs 10 m! Besides, Pfizer Inc must be having some plans of its own as during 2009 it raised its stake in the subsidiary to almost 71% at a considerable cost of some Rs 7.3 bn to the parent .Such investments have got to give a return sooner than later.

The other interesting aspect of this company is that both Handa and Gagrat hardly hold any shares in the company. Mr Handa's stake is a mere 302 shares while Gagrat's holding is even measlier at 200 shares. One fondly hopes that this is s not a reflection of their perception of Pfizer.

Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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