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Abbott India: On a weak wicket - Outside View
 
 
Abbott India: On a weak wicket

It is indeed a pity that Abbott Laboratories has so little to crow about especially when it is celebrating an epoch making achievement in 2010 - namely the completion of 100 years of operations in India. It became a legal entity in 1944 though it started operations in the subcontinent as early as 1910. It is really sad that in such a fast growing healthcare market Abbott chooses to be a mere bit player. And it is this very fast growing healthcare market that the directors’ report harps on. It is of course good to know that its products reach out to 50m patients in India.

A net profit margin of a mere 10% (with some additional help from other income) on a sales revenue of Rs 7.9 bn in 2009 is all that it has to show for its 100 year innings (thankfully , sales in the last decade has grown at a steady if muted rate - up 117% between 2000 and 2009.) But it is the topsy turvy post tax profits that it has carved out in the last decade that catches the eye and should logically drive shareholders to the exit ramp in a hurry. In some sort of gallows humor that is precisely what happened.The shareholder base in the last decade has declined from a peak of 16,156 nos. in 2000 to 13,422 in 2009.

In a competitive environment as in the West the top management would have been shown the door for the dismal state of affairs, but then please remember that in India anything goes.

The company is also not lacking in humor in the exit effort. It bought back 7.98 lakh shares in 2008 at a princely price of Rs 630 per share involving an outflow of over Rs 500m in the process. In a way it was the company’s way of paying back its minority shareholders for it poor showing and simultaneously fattening the control levers of the parent company in the Indian subsidiary. It is now a 69% subsidiary of the parent. In the process the paid up equity got reduced to an even more paltry Rs 136.7m.

The Indian subsidiary of course was unnecessarily loaded with the responsibility of using its meager resources to complete this buyback exercise and in the process issue ‘sweat equity’ of sorts to the parent. The downside benefit of this exercise is that it also helps to show a higher EPS in subsequent years. Interestingly enough the management has also rolled out a stock option scheme for its employees!

Like all MNC pharma companies it chose to grow inorganically by the M&A route, and through divestments. So in the last decade it acquired Boots and Knoll Pharma and sold its Jejuri unit in Maharashtra. Not that it proved to be of much help. And what happens when it runs out of MNC units to acquire? Which is precisely the conundrum that the company is faced with today.

These MNCs dare not acquire Indian pharma companies (Ranbaxy is an exception)as Indian companies primarily specialize in generics, making and selling what are copycat drugs of patent expired molecules. Besides, these MNCs are waging a war against Indian MNCs which seek to market these generics in the West. Even if it acquires an Indian pharma unit it will be unable to sell the generic molecules abroad.

For the present the company makes do with a judicious mix of both traded and inhouse manufacture.By this process one can have both the cake and eat it too.Bought out sales account for more than 60% of gross revenue and some 8% of all bought out sales appear to be routed through Abbott Netherlands and Abbotts USA. Significantly the company generates more than 51% of gross revenue from sales of injectables. And, it is this product line which is completely outsourced.Its miniscule plant at Goa which makes tablets and capsules is not being utilized quite to the extent that it can be. In these 2 product lines too there is quite some emphasis on bought out sales. Pushing its products in the market has also proved to be quite a strain on its finances in 2009 based on a perusal of its funds flow statement.

The company’s mode of operation is difficult to comprehend in the context of it harping on the good work of its R&D laboratory at Goa on which it spent more than Rs 60 m in 2009. In 2007 the company also launched its Corporate Hospitals Division. But there is not much evidence of this division having taken off, inspite if the report dwelving on hospital chains providing world class medical facilities in India.

The company also has some dealings with an Indian entity called Abbott Healthcare Pvt Ltd , an affiliate, but Abbott India has no equity stake in this affiliate.

One hopes that the re-appointed CEO Mr. Vivek Mohan will be able to deliver in his new tenure as he is more than adequately compensated for his troubles.

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.

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