• MARCH 28, 2000

Pharma valuations: a skewed medicine

Would you believe that the market capitalisation of Ranbaxy is more than the combined market capitalisation of Glaxo, Pfizer, SmithKline Pharma, Hoechst Marion Roussel, Burroughs Wellcome, E Merck, German Remedies, Knoll Pharma, Fulford and Abbott Laboratories put together?

Ranbaxy is among the premier Indian pharmaceutical companies. It has an overall market share of 5.1%, owns 17 of the top 300 pharma brands and its width extends to almost 68% of the therapeutic area. It’s the market leader in antibiotic and antibacterial segments. Last year, Ranbaxy entered into a marketing arrangement for its new drug delivery system for ciprofloxacin with Bayer ABS. The company has ambitious plans to target the generic markets in the future. It is targeting one Novel Drug Delivery System every 18 months, filing ten Abbreviated New Drug Applications (ANDAs) every year and has two molecules under trials.

However, there are problems. The domestic formulations market has grown by hardly 7% in FY2000 and the company has not been immune from the trend. While the company did succeed in maintaining operating margins for the full year, Ranbaxy’s fourth quarter was particularly disappointing with exports bailing out the company. (Exports contributed around 50% of the fourth quarter sales which grew overall by 3.6% vis-ŕ-vis the third quarter). Technology licensing income (from Bayer) accounted for 20% of the company’s pre-tax profit for the full year.

The current year seems to be no different. Domestic formulation sales growth still seems to be in single digits. Usually, antibiotic sales are relatively lower post November and the current quarter is unlikely to be an exception. The Bayer deal is expected to bring in another $ 25 million in the current year. This works out to a pre–tax earnings of around Rs 10 per equity share, which is impressive no doubt.

But one is not sure whether it justifies a market capitalisation that is more than the combined market capitalisation of Glaxo, Pfizer, SmithKline Pharma, Hoechst Marion Roussel, Burroughs Wellcome, E Merck, German Remedies, Knoll Pharma, Fulford and Abbott Laboratories put together.

One reason for the stark difference in valuation between Ranbaxy and the multinational companies put together could be the concerns that investors have about these MNCs converting their existing operations into trading companies. The strategy that some of these seem to be following is (a) milk existing brands by transferring manufacturing to low-cost third parties and reduce overheads through VRS and the closure of own plants; (b) transfer profits where feasible through royalties and technical know how fees and (c) launch drugs through fully-owned subsidiaries. However, some large MNC's (e.g., Glaxo, Hoechst) are introducing more products and exploring possibilities of tie-ups and alliances to leverage their existing distribution strengths and franchise.

(Rs m)SalesAs % of
Ranbaxy's sales
PATAs % of
Ranbaxy's profit
ROE (Avg
3 yrs)
Three year
compounded growth
Ranbaxy 15,582   2,012  12.46%10%
Glaxo 8,855 57% 771 38%19.5%11%
SmithKline 3,295 21% 247 12%21.0%17%
Pfizer 3,645 23% 309 15%22.0%10%
Hoechst 5,536 36% 200 10%17.0%3%
Burroughs Wellcome 2,001 13% 293 15%21.8%3%
E Merck 2,780 18% 181 9%24.5%11%
German Remedies 2,080 13% 290 14%29.2%13%
Knoll Pharma 2,910 19% 685 34%40.9%8%
Fulford 1,060 7% (50) -3%
Abbott 998 6% 45 2%11.3%13%
  33,160   2,972    

In both cases, clearly, sentiment seems to have run ahead of fundamentals.

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