Shot In The Arm
The market shifts it attention to the second rung multinational pharmaceutical companies which promise healthy growth and a rich product pipeline from their parents. A report
What is the ideal stock to own today? The company should have good growth rates in volumes, sales and net profit. It should not be in a commodity business and the industry should not be affected by a demand slowdown. The Rs 10,000-crore pharmaceutical industry is an ideal case with many companies satisfying the above conditions. It is not surprising that stocks like Novartis, Glaxo, Dr Reddy's and Cipla have emerged as favourites. But as these front-line stocks move up considerably where they seem to be overvalued (commanding a P/E of 50 to 60), it is natural to look for undervalued scrips in the sector.
This is happening since September as the market found the next rung of pharmaceutical companies. The attraction is largely for multinational stocks where analysts are predicting boom times in the post-patent scenario after 2005. This has resulted in a revaluation of the smaller multinational pharma companies with sales of Rs 200 crore or below. Since July 1998, the share prices have gone up significantly. Wyeth Lederle is up 58 per cent, Rhone Poulenc has advanced 52 per cent, German Remedies has shot up 71 per cent and Abbott Laboratories has gained 66 per cent. The Smart Investor takes a look at these four companies. They are worth buying on intermediate declines for the medium-to-long term.
The first quarter results have definitely been responsible for the September rally. But there is another factor. Most of these multinationals have gone for restructuring in management, product lines and costs in the recent past. Says Jignesh Bhate, analyst, WI Carr: "A number of second rung pharma stock have completed restructuring exercises and the benefits of which will now come through." After the restructuring, the parents plan to launch a host of products aimed at further strengthening their Indian arm that could boost their performances.
All these stocks are MNCs with strong research-driven parents having product pipelines which are said to be the cream of the international pharmaceutical arena. These companies will gain over the Indian counterparts with stronger financial muscle and research driven products. Another factor that has contributed to fueling the valuation of the MNC pharma stocks is that India, in principle, has agreed to implement product patents from 2005 which will make the MNC pharma companies much more stronger in the domestic market.
Abbott Laboratories
Abbott sparked up on the bourses with a major rally from Rs 275 in July to the current levels of Rs 500. Abbott Laboratories is a 51 per cent subsidiary of the US-based Abbott. As per latest reports, the parent is planning to increase its stake to 74 per cent. It is planning a Rs 26 crore rights issue but the price is not yet decided.
The pharma analyst at Insight Asset Management explains three reasons of the rally: "The new managing director Tapan Ray (Glaxo's ex-marketing director) brought revolutionary changes in the management structure. Secondly, Abbot has increased product prices by 5 to 20 per cent in the first quarter. Thirdly, it plans to launch a number of products in the nutritional and hospital segment." Though the company posted a loss of Rs 0.18 crore in 1997-98, it was mainly due to voluntary retirement scheme (VRS) amortisation of Rs 1.75 crore.
Even during the current year, Abbott's products have recorded high growth rates. Claribid in the macrolide segment is growing at 29 per cent and Hytrin, a high potensive terazocin based product, is growing at 40 per cent. Its erythromycin brand has grown 4.4 per cent. In the vitamin segment, Surbex-T has grown 34.3 per cent. Thus all its products have enjoyed considerable growth. Besides, it has recently launched Norvif for HIV. In the nutrition segment, it has already launched Glucerma (a high margin product) a complete food for diabetics. This will be followed by its well known international brands such as Ensure, Ensure Light, Jevity and its pediatric nutrition products. Lupron for prostate cancer and a brand extension of its existing brand Claribid are in the pipeline.
It has also aggressively launching products in the hospital and nutritional segment. Which are expected to contribute 30 per cent of the turnover in future. Abbott's first half sales went up to Rs 50.39 crore from Rs 43.21 crore in September 1997. Net profit rose to Rs 1.66 crore against Rs 0.95 crore. The scrip has doubled at current levels and may still turn around next year as VRS amortisation of Rs 9 crore is pending. Even if this year's profits are Rs 3 crore (excluding VRS), this works out to an EPS of Rs 13 with discounting at 35 times. At Rs 470, the scrip could decline due to the rights issue but look for cheap valuation then.
German Remedies
German Remedies (GRL) was originally promoted by five German companies. Of these, Beecham AG reduced its stake to 2.3 per cent and Nordmark AG sold its entire 4.6 per cent to Asta Medica. The Degussa group of Germany through its subsidiaries Asta Medica, Chemiewerk and Heller holds 26 per cent in GRL. The company has licensed manufacturing and marketing agreement for a number of its parents' products. It is present in high-margin therapeutic segments like hormones, anti-asthmatic, oncology, gastroenterology and has a product portfolio of over 73 drugs. Four of its brands Deriphyllin, Primolut-N, Proluton and Dulcolax rank among India's top 250 brands accounting for 45 per cent of the company's revenues.
Only thirty per cent of the GRL's sales come under DPCO. The company is committed to female healthcare segment which contributes 40 per cent to the turnover. Primolut-N and Proluton are leading products in the female fertility segment. Respiratory products contribute around 22 per cent of the turnover with Deriphyllin accounting for 8 per cent. GRL launched a number of anti-cancer brands in 1994 which have been growing steadily. The anti-cancer segment itself grew by 50 per cent in 1997. In 1997-98, GRL introduced an analgesic Adamon and nasal spray Azep which is one of its kind in India. In the coming months, GRL plans to launch products for liver disorder, gastrointestinal and anti-cancer treatment. In a licensing agreement with Dr Falk Pharma, Germany, the company plans to manufacture and market gastrointestinal and hepatological products.
GRL has entered into a joint venture with Madaus AG. Its plant in Goa will make Agiolax and Agiocur, herbal laxatives based on psyllium seeds and senna pods which Madaus AG was till importing. GRL will receive processing fees from Madaus. "The Madaus venture would add another Rs 5 crore to its bottomline for 1998-99," says Vohra. The stock is worth picking around Rs 530 as earnings growth should cover the rise in stock price even at current levels.
Rhone Poulenc
Rhone Poulenc India (RPI) is a 40 per cent subsidiary of Rhone Poulenc Rorer, France. For 1997-98, RPI recorded a lower net profit of Rs 12.9 crore against Rs 20.16 crore in 1996-97 though sales increased 12 per cent to Rs 164.25 crore. This was attributed to higher interest and depreciation charges and the impact of the generics business acquired from Max India.
The change in valuation came about early this year when Rhone Poulenc Rorer India (RPRI), a 51-49 joint venture of parent Rhone Poulenc Rorer and RPI was merged into RPI. The merger is effective from the current financial year. Earlier new molecules in certain therapeutic groups which were the focus of the parent were being launched through this subsidiary leading to both the Indian companies resulting in a conflict of interest. But the merger is a boon for RPI. Bhate says, "The merger would give RPI an entry into the cutting edge areas of oncology and other segments." Shahina Mukadam, analyst, Birla Marlin, adds, "Introduction of new molecules earlier done through RPRI would be done through RPI." RPRI's product portfolio includes leading products like Taxotere for breast and lung cancer, Campto for colorectal cancer and Granulocyte a growth factor given for chemotherapy.
Earlier RPI had introduced a VRS and reduced its workforce from 1050 to merely 45 workers over three years and merged RPRI and acquired its workforce of 120 staff with it. RPI aimed at reducing the workforce and get its product manufactured by third parties thereby reducing its fixed costs.
Thus with reduced costs and wider presence in unexplored areas, RPI is all set to be its only Indian arm for the parent. In the first five months of the current financial year, turnover rose 32 per cent to Rs 83.10 crore. The company has also completed its Rs 10.79 crore VRS scheme.
This increased its manpower productivity by 40 per cent at its Bhandup formulations unit. RPI has also launched an anti-bacterial product and a cough syrup to strengthen its generic portfolio. It also plans to launch anti-TB drugs in the near future. The scrip touched a high of Rs 620 and is traded at Rs 550. It seems fairly valued at current levels and one can buy at the Rs 480 level.
Wyeth Lederle
Wyeth Lederle India (WLIL) was formed after the merger of three companies; John Wyeth India, Wyeth Laboratories and Cyanamid India's pharma division. Post-merger parent American Home Products (AHP) holds 51 per cent in Wyeth Lederle. AHP is a world leader in female healthcare products and has a considerable presence in contraceptive products with young product profile catering to infant nutrition, cardiovascular, anti-inflammatory and vaccines. However, the Indian arm had relatively matured product profile. Says an analyst, "The parent company was hesitant to introduce any new products and this led to saturated growth."
In the pre-merger scenario, Cyanamid's sales remained stagnant due to poor performance of its major segments tetracycline (old generation drug) and anti-TB. Thus the merger led to better product offering through WLIL with products like Ledercort, a triamcinolone-based steroid which is more potent than prednisolone. Though in the post-merger scenario WLIL has withdrawn certain products to rationalise its product portfolio, its growth remains focused. Currently the company is focused in female healthcare, steroids, antibiotics and vaccines.
The antibiotics segment is a major contributor to sales followed by the steroids segment. WLIL has five brands among the top 250 brands segment: Wymox, Wysolone, Ledermycin, Mucaine and Premarin. Its female healthcare brand Ovral's performance has been stagnant while Premarin is showing growth signs, say analysts.
Recently, the company launched a vaccine for meningitis which is witnessing a 35 per cent plus growth rate. After the merger, the parent has introduced Tetramune the meningitis-B vaccine and antibiotic Tazocin for serious infection. It is planning to launch vaccines for anti-pneumonia and anti-diarrhoea. Clinical trials for anti-pneumonia have already begun. "The parent is planing to introduce products in cardiovascular and OTC products," adds an industry analyst.
Thus its expanded portfolio and new launches will drive growth for WLIL. At current price of Rs 569, the scrip looks fairly valued. Buying could be contemplated in the 430-480 range.