• AUGUST 11, 2004

Performance Summary: Pharma sector

Pharma sector is generally believed to be a defensive sector, as factors that impact demand and supply for this sector are to an extent, different from factors that impact economic growth. This is not to say that the sector is not impacted by economic performance at all. This, to some extent, is true and is apparent from the graph below. While the BSE-Sensex has declined by 9% since April 2004, the pharma index is down only 4% in the same period.

The first quarter of the financial year was more or less good for the pharma companies (5 MNC and 5 Indian companies) in our universe barring a few. While MNC pharma companies more or less serve to domestic market, Indian companies have expanded their presence in the international markets too. The companies under our universe grew by 12% YoY in sales. While these are just numbers, let's delve further into the quarter under consideration.

Rs m)June Q'03June Q'04Change
Net Sales34,32138,48212.1%
Operating Profit (EBDIT)7,5797,7482.2%
Operating Profit Margin (%)22.1%20.1% 
Profit after Tax/(Loss)5,6625,362-5.3%
Net profit margin (%)16.5%13.9% 
P/E (x)25.621.4 

MNC Companies
Looking at MNC's performance, it can be said that the growth in the topline was pretty good considering their old product portfolio. With majors like Pfizer and Glaxo have done better in the quarter, the consolidated topline of these 5 pharma companies grew by 6.6%. The major contributor to this growth was Pfizer, which after several bad quarters showed an impressive growth of 19% in topline. In case of Glaxo, the topline growth would have been higher, if its animal health care business had done better. The pharmaceutical business of the company grew by 5.5% in the quarter. While Aventis Pharma showed growth on the exports side, other MNCs like Glaxo and Pfizer are expanding their operations beyond their existing product portfolio, which will be reflected in the forthcoming quarters. With the impending patent regime, MNC companies are likely to gain, although the gains will be realised over a period of time as opposed to 2005 itself.

MNC CompaniesNet SalesOperating ProfitNet Profit
June Q'03June Q'04ChangeJune Q'03June Q'04ChangeJune Q'03June Q'04Change
Aventis17531,850 5.53%351 518 47.6%233 334 43.3%
Abbott8931,022 14.45%192 224 16.7%232 231 -0.4%
Glaxo29993,113 3.80%710 783 10.3%648 591 -8.8%
Novartis13281,318 -0.75%184 259 40.8%176 211 19.9%
Pfizer10731,275 18.83%11 131 1090.9%12 94 683.3%
Total80468,578 6.61% 1,448 1,915 32.3%1,301 1,461 12.3%
Operating Margin18.0%22.3%       
Netprofit Margin16.2%17.0%       

Indian Companies
In the ‘Equitymaster' pharma universe, we have 5 Indian companies under coverage viz. Cipla, Dr Reddy's, Nicholas Piramal, Ranbaxy and Wockhardt. The consolidated performance of these companies was encouraging (sales growth of 14% YoY). The performance was driven by both higher growth in both the domestic and international markets. Domestic sales grew by about 16.5% YoY, which was better than the performance on the international side.

On the international side, poor performance by Dr Reddy's and lackluster growth in sales of Ranbaxy subdued the overall growth. Going forward, growth in topline is likely to accelerate for biggies like Ranbaxy and Dr Reddy's. The performance of Dr Reddy's in 1QFY05 was one of the worst and it seems that the worst may be over.

Indian CompaniesNet SalesOperating ProfitNet Profit
June Q'03June Q'04ChangeJune Q'03June Q'04ChangeJune Q'03June Q'04Change
Cipla4,542 5,682 25.1%874 1,067 22.1%672 793 18.0%
Dr Reddy's4,659 4,682 0.5%1,109 329 -70.3%936 159 -83.0%
Nicholas Piramal2,990 3,465 15.9%588 628 6.8%345 487 41.2%
Ranbaxy 11,974 13,183 10.1%3,130 3,118 -0.4%2,058 1,961 -4.7%
Wockhardt2,110 2,892 37.1%430 691 60.7%350 501 43.1%
Total26,275 29,904 13.8% 6,131 5,833 -4.9%4,361 3,901 -10.5%
Operating Profit Margin23.3%19.5%       
Net Profit Margin16.6%13.0%       

What to expect?
While MNC pharma companies are totally dependent on the Indian market for growth (Aventis being exception), we expect export contribution to increase for Indian pharma majors, despite a challenging environment (the challenge is both on the pricing side as well as on the regulatory side). While Indian companies are looking to expand their topline through operating in the bulk drugs and generics segment of the international markets, MNC companies are eyeing the opportunity post 2005, when the new patent regime will come into force in India.

In our view, the rationale to invest in Indian pharma company or a MNC is a matter of risk profile. Indian pharma majors will have an uphill task to grow in the domestic market (post the patent regime) and compete with the already established global majors in the international markets. As far as MNC companies are concerned, the access to R&D capabilities and products provide significant competitive advantage. So, pick and choose!

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