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AstraZeneca Pharma: An exit from public glare? - Outside View
 
 
AstraZeneca Pharma: An exit from public glare?

Wealth through health?

AstraZeneca Pharma is not exactly the girl next door that investors would like to get familiar with. Not that the foreign principals are much concerned about the lack of any puppy love either. The equity holding of the parent company is just shy of the 90% mark, and presumably after the present court hearings against the price offered in the buybacks are over, the parent may well seek to delist and go private. The Indian subsidiary has several 'non biological' parents-its ultimate pater is based out of the UK, but its immediate parent resides in Sweden.

The Foreword to the annual report commences by stating that AstraZeneca is a global innovations driven 'biopharmaceutical' business, which is out to make a meaningful difference to the health of patients through great medicines. One wonders which overexcited copywriter is the author of this report, because that should be the objective of any pharma company in the first place. As a part of this strategy it elucidates, the company has during 2009 introduced 8 new products including the blockbuster drug Crestor. The doctrine concludes by pontificating that through this process of improving the health of a larger number of patients in India, it will thereby create value to its shareholders. As the company intends to delist in the not too distant future, which shareholders is the Foreword referring to please?

Inter sibling dealings

The immediate aftermath of the introduction of the new products in 2009, is the dunking that it received on the profitability front. Pretax profits dropped 23% despite a 10% increase in gross sales, excluding other income. It also dabbles in clinical trials (shown separately as Service Income) but apparently goes about this activity more probably to humour its foreign principals than to make a living from it. The company ekes a marginal profit from this 'diversification'.

Rupee sales accrue through all possible avenues, including manufactured sales and, traded sales of the imported bought out variety, and, of the local bought out variety. Traded sales at Rs 1.4 bn accounted for 36% of all sales compared to 31% or Rs 1 bn in the preceding year. Given the number of siblings and parents that it has, it is also forced to accommodate a large number of them. Accordingly it had dealings with some ten companies within the group (based on year end balances) if not many more. The list of inter-se transactions include raw material imports, to items bought out for sale from its principals, to sales effected by the Indian unit to its foreign principals or other siblings (dealings under both these heads are very substantial), to payments made towards reimbursement of expenses, and finally to receipts under the same category. One may also note here that the gross margin that the company obtained on the sales of bought out traded items is very impressive too-a cool Rs 641 m against Rs 407 m in the preceding year. Its dealings with AstraZeneca India, the privately held arm, include payment of rent and some other indecipherable transactions.

Growing pains

The company quite apparently experienced difficulty in pushing sales during the year, which grew only a meager 10% to Rs 3.9 bn, and, despite the introduction of new products at that. Sharp increases in material input costs, coupled with similar increases in expenses such as employee payouts, and under the heads of marketing, travel and legal, added to its woes. With a view to stamping a pan India presence as quickly as possible, the company doubled its sales force during the year, which it says it intends to increase further in 2010 also, to accommodate the launch of still more products. Considering the initial start, making money it is going to be a very uphill task.

The more than disproportionate increase in material costs relative to the increase in rupee sales, implies that the company faced problems in pricing its products adequately in the market. No 'pucca' explanations are on offer on where the hiccup lies. But given the company's determination to go the whole hog, one presumes it knows what it is getting into. As a part of the frenetic effort to grow in size, the company has also decided to set up a new tablet manufacturing plant costing Rs 700 m at Yelahanka in Bangalore. Finding the dough to finance this new addition will be easy. It is virtually debt free and cash rich to boot. It could also do with topping up its existing fixed assets which appears to getting increasingly neglected, unless of course the emphasis in future is to be on greater outsourcing to meet local market demand.

An exit from the public glare…

It is indeed a pity that just when the company is readying to take flight and soar into the heavens, it is also making plans to exit from the public limelight. In all probability the two decisions are more than interlinked.

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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